Many of Robinhood’s detractors accuse the company of acting in the interest of institutional short sellers rather than the individual retail investors that rely on it. It wouldn’t be the first time the company allegedly put those big bankrolls first; in December it paid a $65 million fine to the Securities and Exchange Commission to settle charges that it had misled users about the revenue it made selling its customers’ orders to third-party trading firms. Robinhood did not admit or deny any wrongdoing as part of the agreement.
“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to,” Robinhood said of the restrictions it imposed on Thursday.
Another complaint, filed around the same time as the SEC settlement, might be more instructive when it comes to Robinhood’s actions Thursday. On December 16, the state of Massachusetts lobbed a complaint against Robinhood, accusing it of “aggressively targeting young, inexperienced investors” and exposing them to “unnecessary risk.” It’s the latest in a long arc of accusations that Robinhood’s playful interface makes buying and trading stocks too easy and downplays the downside risk.
“They’ve gotten a lot of criticism that it makes it too easy to trade, too much fun to trade,” says Jim Angel, who specializes in market structure and regulation at Georgetown University’s McDonough School of Business. “When Robinhood sees a situation that they know is going to end really badly, they’re going to be worried that if they don’t do something, people are going to come back and say, ‘Why did you let me buy this stock at $300?’”
Financial experts universally agree that GameStop will eventually crash back to a price that reflects its actual fundamentals, and when it does, a lot of people are going to find themselves on the wrong side of that trade and lose a whole lot of money.
In that interpretation, Robinhood is something like a bartender cutting things off before the party turns into a riot. Restricting stock trades also isn’t unique; Angel points out that many brokers don’t let customers trade in penny stocks without special authorization, for instance. The difference with GameStop et al. is one of scale. “There’s definitely a history of this kind of paternalism,” Angel says. “But there’s a really good question of how paternalistic should the brokerage firm be?”
Then again, if Robinhood had its users’ best interests in mind, it could have made this exact move days ago; GameStop’s stock has long since abandoned any pretense of relating to the company’s fundamental financial outlook. “It’s a little late to do it to protect the customer base,” says Gabriel Rauterberg, a professor at the University of Michigan’s law school and coauthor of The New Stock Market: Law, Economics, and Policy. Especially given that Robinhood also may have helped spark a sell-off Thursday morning; GameStop is down 44 percent from Wednesday’s close, and losses in stocks like AMC have been even more dramatic.
It seems more likely that Robinhood is trying to protect itself from SEC scrutiny. It was just yesterday, after all, that the agency said it was “actively monitoring the on-going market volatility” and the various parties to it. “Since Covid-19 led to a massive increase in retail trading, Robinhood has been more in regulators’ sites,” says Rauterberg. GameStop is the most dramatic of these incidents but not the first; individual traders drove Hertz to improbable heights this summer while it was in bankruptcy, and WallStreetBets has previously given a boost to stocks like Plug Power and Lumber Liquidators. “Now it’s become undeniable that massive retail trading is leading to some weird things happening in the market.”
That wariness of regulators showed up in Robinhood’s statement Thursday afternoon. “As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,” the company wrote. “Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.” Bloomberg reported Thursday that Robinhood had tapped into hundreds of millions of dollars of its credit lines recently, implying that it may face financial risk of its own related to executing these trades.