GameStopped: How Robinhood’s GameStop Trading Halt Reveals the Complexities of Retail Investor Protection

Fordham Journal of Corporate & Financial Law Volume 28 Issue 2 Article 3 2023 GameStopped: How Robinhood’s GameStop Trading Halt Reveals the Complexities of Retail Investor Protection Neal F. Newman Texas A&M University School of Law Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Banking and Finance Law Commons, Business Administration, Management, and Operations Commons, Business Intelligence Commons, Business Organizations Law Commons, and the Securities Law Commons Recommended Citation Neal F. Newman, GameStopped: How Robinhood’s GameStop Trading Halt Reveals the Complexities of Retail Investor Protection, 28 Fordham J. Corp. & Fin. L. 395 (2023). This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact . GAMESTOPPED: HOW ROBINHOOD’S GAMESTOP TRADING HALT REVEALS THE COMPLEXITIES OF RETAIL INVESTOR PROTECTION Neal F. Newman ABSTRACT Should brokers have the unfettered right to restrict investor trading? GameStop, a brick-and-mortar video game retailer, had been experiencing declining revenues since 2016. However, GameStop saw its share price climb almost 1000 percent in the span of a oneweek period from January 21, 2021 to January 27, 2021 due to retail investors buying significant amounts of GameStop shares during that period. Melvin Capital, a hedge fund, ended up losing billions as they were betting that GameStop shares would lose value instead of increase—a practice referred to as short selling. On January 28, 2021, brokers inexplicably halted trading on GameStop shares thus capping any further losses to Melvin Capital while at the same time capping potential further gains for the retail investors. Most of the retail investors were customers of one brokerage firm— Robinhood, Inc. for which Robinhood drew much criticism. Was Robinhood’s decision to restrict trading a result of some financially commingled allegiance to Melvin Capital or was it driven by some other reason? Moreover, is trading in the public equity markets “rigged” to favor the big hedge funds and institutional investors to the detriment of retail investors?  Professor of Law, Texas A&M University School of Law. J.D., Howard University School of Law; B.B.A. University of Michigan. The author extends particular thanks to Texas A&M University for providing him with a research grant to support this effort. Additionally, the author thanks his research assistant, Johnathon Blaine for lending his expertise in the information gathering and preparation of this Article. All errors and omissions are my own. 395 396 FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW [Vol. XXVIII With the use of technology, online trading platforms, and social media, public trading markets are evolving resulting in unprecedent occurrences. Is the current regulatory environment properly situated to maintain a “fair and orderly” public trading market? Do brokerage firms need to reexamine their operating protocols in relation to their retail investors? This Article adds to the discussion by exploring these questions. INTRODUCTION ............................................................................ 397 I. THE EVOLVING DAY TRADING LANDSCAPE........................ 401 A. Online Trading ............................................................... 402 B. Payment for Order Flow ................................................ 403 C. Social Media & WallStreetBets ..................................... 407 II. HEDGE FUNDS ..................................................................... 408 III. SELECTING A SHORT SELL TARGET ................................... 411 IV. ROBINHOOD PLACES TRADE RESTRICTIONS ON ITS CUSTOMERS ......................................................................... 412 V. CLEARING HOUSES AND COLLATERAL REQUIREMENTS.... 416 A. Robinhood Traders – The Run–up on GameStop.......... 417 B. Robinhood’s Decision to Restrict Trading Was Discretionary.................................................................. 418 VI. SHOULD BROKERS HAVE AN OBLIGATION TO PROTECT? . 422 VII. IN THE GAMESTOP AFTERMATH..........................................424 VIII.SOLUTIONS .......................................................................... 425 A. Time to Revisit the Customer Suitability Rules?........... 425 B. Gamification .................................................................. 427 C. Limit the Time Between Trade Date and Settlement Date .............................................................. 429 D. Why Not T+0? ............................................................... 430 E. Caps on Margin Lending ............................................... 431 F. Suitability Scores ........................................................... 433 G. Inform Brokerage Customers That Their Trading Could Be Restricted ....................................................... 435 H. Inaction .......................................................................... 436 CONCLUSION ................................................................................ 437 2023] GAMESTOPPED 397 INTRODUCTION On Thursday, January 28, 2021, Robinhood, a brokerage firm that provides no-fee online trading for retail investors, made the unprecedented decision to place restrictions on its retail investors, thereby denying them the ability to make further share purchases of the brick-andmortar gaming retailer GameStop.1 When Robinhood placed these restrictions, GameStop shares were selling at a high of $120.75 per share.2 Notably, 6 days earlier, on January 22, 2021, the shares were selling at a high of only $19.19 per share.3 Moreover, 2 weeks prior, on January 8, 2021, GameStop shares were selling at a high of $4.57 per share.4 Robinhood received harsh criticism for its decision to halt trading. In addition to retail investors, political influencers on both sides of the aisle criticized Robinhood as well. Billionaires such as Elon Musk5 and Warren Buffet,6 chastised Robinhood for denying retail traders the right to purchase shares in a publicly traded company. 7 Critics asserted that Robinhood’s decision to halt trading was due to some inappropriate conflict of interest entangling Robinhood.8 These 1. Matt Egan, This App Completely Disrupted the Trading Industry, CNN BUS. (Dec. 13, 2019), https://www.cnn.com/2019/12/13/investing/robinhood-free-tradingfractional-shares [https://perma.cc/E5KT-KAP5]; Megan Leonhardt, Robinhood Now Faces Roughly 50 Lawsuits After GameStop Trading Halt—Here’s How Customers Might Actually Get Their Day in Court, CNBC: MAKE IT (Aug. 31, 2021), https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-tradinghalt.html [https://perma.cc/5GJV-6VM7]. 2. GameStop C (...truncated)