Broad Discretion
Brokerages are permitted broad discretion in limiting trades to provide flexibility in handling unusual situations like technical glitches, mechanical errors and mistakes, or to preserve an orderly market, said Columbia Law School professor Joshua Mitts, who specializes in corporate law.
“There is no obligation that a broker-dealer has to unconditionally accept orders to buy, sell or short-sell securities,” said Cam Funkhouser, a former executive at the Financial Industry Regulatory Authority, a Wall Street-backed regulator that oversees broker-dealers. “If they do accept orders, it is expected that the transaction is executed and settled in compliance with the applicable rules,” said Funkhouser, who worked at Finra for 35 years and oversaw its national fraud-detection office.
The lawsuits “are likely subject to dismissal based on customer agreement language,” said Elliott Stein, a senior litigation analyst at Bloomberg Intelligence.
“It is understandable that many investors are upset by the sudden restrictions to trade certain stocks,” especially if they didn’t read the user agreements very carefully, said Tom Lin, a law professor at Temple University’s Beasley School of Law whose specialties include securities regulation. “Whether brokerages should exercise that power in the current circumstances is up for legitimate debate. There is likely so much more to this story than we know at the moment.”
Depends on Situation
Still, while user agreements “tend to be pretty broad” in allowing brokerages to decline working with anyone, they aren’t always an absolute protection from aggrieved clients, said Timothy Blood, a partner with Blood Hurts & O’Reardon in San Diego, who has represented investors in disputes with brokerages.
“It’s going to depend on the particular situation that arises,” Blood said.
There might be liability if a brokerage allows trades by some clients but not others, especially if the one being denied needs access to the market to complete a longer-term strategy with additional trades, Blood said.
“If a long-term plan gets cut off midstream, the clause helps Robinhood but won’t be the last word on the issue,” he said.
Double Standard?
“I think it’s extraordinarily rare for brokers to halt that trading” without a determination by regulators that it was necessary, said Adam Gana at the national securities-arbitration law firm Gana Weinstein.
The surge in share prices was the result of “a band of investors getting together to purchase a security,” not some “insider collusion pumping up the price,” he said. The filing of lawsuits “tells me that the broker-dealers who stopped trading by their own volition are potentially going to be in a lot of trouble -- both on a regulatory level and on a civil-litigation level,” he said.
While Robinhood’s customer agreement clearly states that it can suspend trading at any time, it does raise questions about whether the platform treated some users differently than others, especially after cases in the past decade of market manipulation by short sellers that disadvantaged retail investors, said Mitts, the Columbia Law School professor.
“When hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level,” Mitts said. “But when retail investors find themselves locked in, they find themselves unable to exit the trade.”