Lawsuit filed in the US District Court of New York says Robinhood's decision to block trading of GameStop stocks "deprived retail investors of the ability to invest in the open-market."
Investors have filed a class action lawsuit against trading app Robinhood after the company announced it will no longer allow margin trading of shares of both GameStop Corp and AMC Entertainment Holdings.
The lawsuit filed at US District Court for the Southern District of New York on Thursday said the move by Robinhood "deprived retail investors of the ability to invest in the open-market and manipulating the open-market."
Robinhood was among few retail stockbrokers who placed trading restrictions and other security measures on GameStop, AMC stocks after the shares skyrocketed this week without a clear reason, The New York Times reports.
Robinhood's decision resulted in condemnation from many online including US Representative Alexandria Ocasio-Cortez who called it "unacceptable" and voiced her support for a court hearing.
Alexander G Cabeceiras, the attorney who filed the lawsuit, announced the news on Twitter saying "Let The People Trade."
This morning I filed a class action lawsuit against Robinhood for negligence and breach of fiduciary duty, among other claims. NELSON v. ROBINHOOD FINANCIAL LLC et al, 1:21-cv-00777. In Robinhood's own words "Let the People Trade." @wallstreetbets— Alex Cabeceiras (@AGCabeceirasEsq) January 28, 2021
The shares of GameStop skyrocketed this week, squeezing hedge funds that had bet against the video game retailer and other companies that were out of favour on Wall Street.
On Wall Street a "short squeeze" can result in a dizzying rally by forcing short-sellers into becoming buyers.
As a result, GameStop surged 18 percent on Monday, another 115 percent on Tuesday and had leapt 135 percent on Wednesday. That followed a stunning 50 percent jump on Friday.
Alongside Robinhood, TD Ameritrade was among the companies that placed the trading restrictions including limiting of short sales “in the interest of mitigating risk for our company and clients" on Wednesday, the Times said.
Chief Executive Vladimir Tenev said the company restricted trade to protect the company and its customers.
"We absolutely did not do this at the direction of any market maker or hedge fund ... the reason we did it is because Robinhood as a brokerage firm, we have lots of financial requirements," Tenev said on CNBC.
"In order to protect the firm and protect our customers, we had to limit buying in these stocks," he said, adding it was a "difficult decision".
Billions in losses
The battle between small-time traders and hedge funds that has shaken US and European stock markets moved into Asia on Thursday, with surges in several Australian companies joining a list of social-media hyped moves that have cost financial institutions billions of dollars.
Heavily shorted Australian shares, including Webjet and Tassal Group, climbed more than 5 percent even as Sydney's benchmark ASX 200 index fell 2 percent.
In New York, GameStop, the video game chain at the heart of the slugfest between Wall Street and Main Street, added another 37 percent in early trading after a two-week, 1,700 percent surge that has hammered fund investors who were betting the stock would fall.
Short-sellers are sitting on estimated losses of $70.87 billion from their short positions in US companies so far this year, data from financial data analytics firm Ortex showed on Thursday.
Driven by an army of individual traders who work through online brokerage apps like Robinhood.com and discuss stocks on anonymous social media messaging boards, the dramatic jump in the stock price of companies including GameStop, BlackBerry Ltd and AMC Corp drew more calls for regulatory scrutiny from commentators.
"The frenzy raises all sorts of questions with respect to possible market manipulation," said Michael Hewson, chief market analyst at retail broker CMC Markets UK.
"It is already illegal for institutions to coordinate in the manner currently being seen in moving prices on these stocks, raising questions about the legality of what is currently taking place right now on these forums."
The short squeeze — where traders have to abandon loss-making "short" bets on a stock falling because it has instead risen — also fuelled a 2 percent slide in the benchmark S&P 500 on Wednesday as investors sold other assets to cover their losses.