Maybe the lawsuit will fail, but they will obviously take a giant reputational hit and it is fascinating to me that they chose to do that. What is the upside? The only thing that makes sense to me is that the owners of Robinhood have too much conflict of interest with the hedge funds that were losing money (and so are acting against the best interests of Robinhood itself in favor of their funders).
Alternatively, maybe they're being honest about it and what's going on at this point has nothing to do with hedge funds and everything to do with what appears to be a scheme to pump up the price and the people that are controlling the narrative sell first.
It's unclear what hedge fund is getting it stuck to them at this point, didn't they say they covered their position already?
If that is true, then it really does start to look like what started as an interesting way to penalize hedge funds doing this has turned into a bitcoin-style bubble. Which can also be a useful point to make, but a point that is completely disconnected from the desire to screw over hedge funds.
I personally am going to switch away from them to some other brokerage. Their app is very well made though so I hope the competition catches up
Lesson: don’t have an evil business model because it will catch up to you.
1. The problem with RobinHood's behaviour here, is that they are doing price manipulation (By only allowing sells, instead of buys.)
2. Price manipulation isn't really a crime against their customers, it's a crime against the stock market. Their customers will sue them, but probably won't get much. It's a bit hard to make a case for "You stopped me from trading, when I was planning on making a lot of money from trading, by cashing out right before a bubble popped."
3. The SEC is supposed to deal with crimes against the stock market. They may or may not sanction RobinHood, but I doubt the sanctions will be serious.
4. The SEC might look into the obvious collusion problems, where the owners of the GME shorts may have reached out to the exchanges/settlement networks, and tried to block retail traders from buying GME. This may or many not result in financial penalties. Even if sanctioned, this may be worth it for the owners of those shorts, because the alternative is bankruptcy, complete financial ruin, and the sale of their children, their grandchildren, and their great grandchildren into sixty years of bondage.
5. Your thesis is sound, but the SEC works with, and for large players in the market. Those players want a mostly-fair market. If the counterparty on the other end of these trades were not retail morons on reddit, the SEC might be a bit more heavy-handed in their enforcement. The thing is, most price rallies are not driven by retail morons on reddit... So, if your business plan consists of "Short a stock to 100%, then call up all the exchanges and settlement networks, and tell them to only allow you to buy stocks," there's going to be a lot of really wealthy counterparties to your trades, who are going to be really, really pissed, and you will probably lose all your money and go to jail.
#5 is unlikely to happen here, because the narrative around this is 'Ha, look at all the dumb retail money driving a bubble, we are just deflating it before retail traders get burnt.' And that narrative is partially true, which is why it's making the news cycles, and serious talking heads on the television repeat it with a straight face.
... Also, I would like to point out that there is nothing wrong with shorting a stock, or shorting a stock past 100%. Yes, it can trigger a short squeeze. No, I don't really think there should be rules against it, or against short squeezes. These are institutional investors, who surely must understand that short-selling a stock carries unbounded risk. If they wanted bounded risk, they should have bought puts.
> As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
> To be clear, this decision was not made on the direction of any market maker we route to or other market participants.
I smell bullshit. These are long positions, these aren't options, or trades on margin. Robinhood, and its settlement network (As well as other exchanges, who have stopped retail traders from buying GME) carries effectively no risk for settling buys and sells in them.
Basically so many shorts were sold, way more than what exists when trying to cover them, the cover would fail, the clearinghouse would raise the margin rates of Robinhood so much if this kept happening that it would cause them to go out of business.
It sounds like nonsense, because what she's describing is not Robinhood's problem. The shorts are predominantly being done by hedge funds (with only a few retail investors here and there). Hedge funds aren't trading on retail platforms, like Robinhood. It's not Robinhood's problem that the hedge funds are being eaten alive on margins, or if the hedge funds are having problems with the clearing houses.
If margins, and the Robinhood/clearing house relationship were the problem, then Robinhood would stop people from opening new margin positions on GME. But that's not the case, here. They are preventing people from entering non-margin long positions.
Do you have a different take on this?
Edit: https://news.ycombinator.com/item?id=25951475 seems to be a different take on this. One that makes a lot more sense then the lady on television. The tl;dr of it is that even for a simple, non-margin stock trade, RobinHood needs to put dollars up as collateral... And they ran out of dollars.
They identify (possible) crimes, the Justice Department deals with them.
The SEC only “deals with” civil wrongs, not crimes.
There, fixed that for you.
This kind of blatant manipulation is the first time. And yes if they get away with it, chances are that they will do more of it.
Order books have been nationally integrated since 2005 [1]. This is how independent HFT firms got their start.
Is the society already working this way?