Robinhood’s trading restrictions go beyond contractual discretion, traders say

Less than a month after online trading company Robinhood revived its efforts to dismiss a multi-district litigation over the trading restrictions it imposed in January 2021, the traders who brought the lawsuit have responded to Robinhood’s arguments.

The traders’ response was submitted at the Florida Southern District Court on November 5, 2021.

According to the traders, this case involves the failure of a securities broker to prepare for the risk associated with its own market disruption. Robinhood’s business model was to secure revenues from payment for order flow (PFOF) by entities to which it steered its customers trades for execution.

It therefore pursued a continual increase in customers and their trading to fuel to generate increased revenues from payment for order flow, while knowingly and recklessly continuing to facilitate a level of volatile trading on its platform that it failed to support with adequate capital resources. The plaintiffs claim that it was this failure that directly led to Robinhood’s sudden decision to pull itself back from the brink by intentionally devastating the market for in-demand securities concentrated on its platform.

Robinhood’s decision in late January 2021 to move 13 securities to position closing only (PCO) rendered the financial system inaccessible to millions of investors, who were forced to sell at depressed prices or hold and watch as the value of their holdings fell precipitously, while institutional investors saved billions in potential losses.

Robinhood has argued that its actions are in accord with the Customer Agreement. But the traders say that Robinhood’s actions in late January 2021 go far beyond its contractual discretion to “prohibit or restrict [its customers’] ability to trade securities.”

The traders say:

“By implementing an unprecedented shutdown of the entire demand-side of the market for securities known to be concentrated on its platform, Robinhood severed one of the two requisite legs for a fully functioning market: its actions artificially suppressed market prices and harmed a Class of not only Robinhood customers, but all investors who held the Suspended Stocks. While broker-dealers may reserve certain discretion in their agreements, such discretion must be exercised in good faith and in accordance with applicable industry standards of care”.

The crux of this case centers on Robinhood’s participation in fueling the market volatility which it was unprepared to handle and now uses to deflect blame. Robinhood admitted to failing to maintain adequate capital to pay its clearinghouse-mandated deposit requirements when due and failing to take reasonable steps to make sure that its platform was available in times of market stress.

Leading up to Defendants’ unprecedented action, Plaintiffs and the Class were aggressively recruited to Defendants’ platform by targeted marketing campaigns and addictive, gamified user interfaces on the platform. Defendants boasted about their meteoric rise, fueled by legions of relatively inexperienced retail investors who were provided a “clickwrap” user agreement on a non-negotiable, take-it-or-leave-it basis before they could access Defendants’ trading platform.

The traders accuse Robinhood of selectively citing and interprets provisions of its Customer Agreement as giving it carte blanche to “restrict the trading of securities” while its COO dumped his AMC stock 24-hours before the so-called “restrictions” took effect. The traders refer to one short email from Chief Operating Officer James Swartwout:

“I sold my AMC today. FYI—tomorrow we are moving GME to 100% – so you are aware.”

Further, the traders say that Robinhood neglects those portions of its Customer Agreement where investors are expressly asked to acknowledge that “Robinhood Financial provides trading and brokerage services through the Robinhood website and the Robinhood mobile application (the ‘App’).” This is because, the traders note, it knows full well that “a contract to perform services gives rise to a duty of care which requires that such services be performed in a competent and reasonable manner. A negligent failure to do so may be both a breach of contract and a tort.”

The traders stress that there are limits to Robinhood’s purported “discretion.” When taken to its logical extreme, Robinhood’s argument would mean that service providers can be immune from legal scrutiny if only they reserve for themselves “sole discretion” to complete (or not complete) the very service they are contracted to perform regardless of the resultant injury. This would also make the agreement completely illusory.

Finally, the plaintiffs note that Robinhood forged ahead under the belief that it was too big to fail. In response to inquiries by the National Securities Clearing Corporation (NSCC) related to deposit requirements intended to protect all market participants against clearing member defaults, Robinhood Financial’s own President and Chief Operating Officer, David Dusseault, stated they were:

“to [sic] big for them to actually shut us down.”

The traders conclude that Robinhood’s Motion to Dismiss should be denied in its entirety.

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