The investigation is connected to the broker’s actions during last year’s meme stock rally.
- In January 2021, seven meme stocks, including GameStop, experienced high volatility due to buy-side pressure by retail investors.
- The broker Robinhood halted trading of many of these stocks on Jan. 28, leading to wild speculation.
- The court case is far from resolved, as retail trust in brokers is shaky.
For many retail investors, the events of late January 2021 will go down in legend. With over a quarter of Americans buying meme stocks in the month of January, the markets were rife with volatility. But the actions of one broker amidst the rally, when it stopped the trading of seven stocks on its platform, have been heavily litigated since. Learn more about the court case and what it means for you.
The meme stock rally
The year 2020 could be characterized as the rise of the retail investor. Stuck inside, stimulus checks in hand, and lacking other entertainment options, droves of Americans turned to day trading.
Amid the retail revolution, one voice rose to the top. His name is Keith Gill, and his platforms are Youtube and Reddit. Among other investment analyses, Gill recognized that fan-favorite stock GameStop was ripe for a short squeeze. What followed wasn’t contained to just GameStop stock. Encouraged by the low cost of investing, millions of Americans joined commission-free trading app Robinhood to get in on a piece of the action.
In January 2021, retail investors, spurred on by Gill’s “double down” analysis, flooded into seven stocks, including AMC, GameStop, and Bed Bath and Beyond. The heavily shorted positions were overwhelmed by buy orders, driving the shares through the roof. In the case of GameStop, the stock rose from around $4 per share to around $92 per share.
Robinhood’s trade halt
On Jan. 28, Robinhood took action when the online broker halted trading on certain stocks, including GameStop and AMC.
The move by Robinhood was attributed to market volatility in a statement on the company’s website. In all, six stocks were affected, with Robinhood allowing users to sell their shares but not buy any new ones.
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The move by the broker sparked anger across online forums and social media platforms, with some users calling for legal action against the company. Robinhood maintains that the trading halt was in response to a failure to post $3.7 billion to its clearing house, not a conspiracy against retail investors.
Where millions of investors feel unfairly left out of a market frenzy, a lawsuit is sure to follow. This summer, a class-action lawsuit in Florida materialized to set the record straight on Robinhood’s actions during the meme stock rally.
On Aug. 8, a Miami federal judge allowed a case against Robinhood to move forward, citing market manipulation charges of clearing the threshold of litigation. So far, the judge has thrown out charges that Robinhood colluded with hedge funds to restrict trading, and that the broker was negligent in breaching its duties to customers. For now, the case revolves around the broker’s alleged misleading statements hiding its lack of capital.
The case against Robinhood has far-reaching implications, even for investors who are not involved in the lawsuit. While the long-term effects of the case are still unclear, one thing is certain: Robinhood’s actions have shaken investors’ confidence in broker dealers.