Citadel, Apex, IBKR, Robinhood oppose conspiracy claims in short squeeze lawsuit

The defendants in the antitrust tranche of a multi-district litigation concerning the January short squeeze have responded to the amended complaint filed by the plaintiffs in this case.

Let’s recall that, according to the plaintiffs, this case is about individual investors who invested their money in the stock market and were stripped of their rights to control their own investments. The traders accuse the defendants and other market players of hatching an anticompetitive scheme to restrict Retail Investors’ access to the stock market and prevent the market from operating freely and fairly.

According to the traders, the defendants did so to protect each other, and to stop the hemorrhaging losses incurred by the Market Maker Defendants as a result of their accumulation of large short positions.

On October 5, 2021, the defendants in the antitrust tranche: Citadel Securities, LLC, Apex Clearing Corporation, ETrade Financial Holdings, LLC, ETrade Securities LLC, Electronic Transaction Clearing, Inc., Interactive Brokers, LLC, PEAK6 Investments LLC, Robinhood Financial LLC, Robinhood Markets, Inc., Robinhood Securities, LLC, filed a reply to the Corrected Consolidated Class Action Complaint” (“CCAC”). The document, seen by FX News Group, also serves as support to defendants’ motion to dismiss.

The defendants argue that the plaintiffs have utterly failed to plead a cognizable antitrust claim that can survive a motion to dismiss. According to the defendants, what is missing from the complaint are, inter alia,

1. sufficient factual allegations of any agreement between any Defendants (let alone among all of them) to restrict trading in any security;

2. any attempt to identify any benefit that any of the brokers (self-clearing or otherwise) received from allegedly restricting trading to help Citadel Securities; or

3. any plausible explanation for how a conspiracy arose that resulted in the members imposing disparate restrictions on disparate sets of stocks, while at the same time other brokers not alleged to be part of the conspiracy and/or now voluntarily dismissed from the case took similar steps.

According to the defendants, the facts alleged in the CCAC give rise to only one plausible explanation:

“in the face of unprecedented market volatility spurred on by internet speculation, various brokers, including non-Defendants, acted independently to protect the integrity of the marketplace and their customers’ ability to trade broadly in securities by implementing a variety of temporary trading restrictions that differed in duration and scope, tailored to each of their circumstances”.

The defendants note that it is clear that the communications cited by the plaintiffs do not evidence any agreement at all, let alone the anticompetitive agreement Plaintiffs ask the Court to infer. The communications between Robinhood and Citadel Securities (and among Robinhood employees about Citadel Securities) do not contain or indicate any agreement to restrict trading in any security, the defendants say.

The defendants add that the complaint is devoid of any allegation of any communications (let alone any agreement) between: (1) Citadel Securities and Apex, (2) Citadel Securities and Interactive Brokers, (3) Citadel Securities and any (now dismissed) Introducing Broker Defendants, (4) Robinhood and E*TRADE, (5) Robinhood and Interactive Brokers, (6) Robinhood and any (now dismissed) Introducing Broker Defendants, (7) Apex and E*TRADE, (8) Apex and Interactive Brokers, (9) E*TRADE and Interactive Brokers, (10) E*TRADE and any (now dismissed) Introducing Broker Defendants, and (11) Interactive Brokers and any (now dismissed) Introducing Broker Defendants.

In short, the defendants say that the cited communications show only that some defendants have pre-existing business relationships. The fact that they would communicate during the relevant time is not only unremarkable, it is in fact fully expected, the defendants explain.

For example, the plaintiffs are said to offer no explanation for why it is plausible to infer a conspiracy among the defendants when other brokerages —not alleged to be part of any conspiracy —“employed similar tactics to prevent Retail Investors from opening positions in at least one or more of the Relevant Securities.” These brokerages included TD Ameritrade (restrictions on GME and AMC) and Charles Schwab (restrictions on GME, AMC and EXPR), neither of which Plaintiffs allege conspired with anyone.

They also included Cash App Investing LLC, eToro USA Securities, Inc. and Barclays Bank PLC, which Plaintiffs similarly do not allege were part of any conspiracy. The fact that parties not alleged to be members of the conspiracy acted similarly as alleged conspirators indicates that the restrictions arose from permissible business reasons, not anticompetitive ones.

The defendants argue that an alternative explanation for why each broker defendant (and non- defendant) enacted trading restrictions in late January 2021 is the extraordinary market volatility. This was the “common stimulus] to which Defendants had “independent responses.”

According to the defendants, the market volatility spurred the NSCC to issue outsized collateral calls on many brokers, including some broker defendants, which, in turn, required them to take individual measures to reduce their firms’ risk exposure. Still others were compelled by the volatility to implement their own restrictions, even absent outsized collateral calls.

Further, the defendants argue that the plaintiffs fail to articulate a plausible common motive for the defendants to engage in the alleged conspiracy. The common motive that the plaintiffs assert is that “the defendants had a collective interest in maintaining their mutually beneficial business relationships” based on “lucrative payment for order flow relationships with Citadel Securities.” The defendants say that this argument fails.

The defendants argue that the plaintiffs do not allege adequately that Citadel Securities actually held a short position in the Relevant Securities. In fact, Plaintiffs admit “it is generally impossible to ascertain which investors have a short position in a particular security at any point in time.”

Furthermore, according to the defendants, the plaintiffs do not allege that Citadel Securities threatened to (or even suggested that it would) cut off business relationships with any broker defendant, or that it would retaliate against any defendant if those brokers did not agree to protect Citadel Securities’ alleged short position in the Relevant Securities.

Also, the defendants stress that the plaintiffs do not address the fact that Citadel Securities is not the only market maker. If it had cut off PFOF, there are other entities from which brokers direct order flow and receive such payments.

In addition, the defendants note that the plaintiffs do not allege that Citadel Securities stopped accepting buy orders for the Relevant Securities from any brokers at any time.

The defendants also note the plaintiffs’ repeat that government investigations “are indicative of anticompetitive collusion.” But simply pleading “the existence of government inquiries is insufficient to raise an inference of conspiracy.” Indeed, the plaintiffs later claim: “there is no evidence that the Securities and Exchange Commission (SEC) is investigating or plans to investigate the defendants’ collusive behavior.”

The defendants conclude that even with the benefit of documentary evidence ordinarily unavailable at the pleading stage, the plaintiffs still fail to adequately plead a claim. According to the defendants, the CCAC should be dismissed with prejudice.