Republican Texas Attorney General Ken Paxton announced Friday that he was launching an investigation into Robinhood, Discord and other companies that suspended stock trading this week.
“Today I’m launching an investigation into @RobinhoodApp, @discord, and hedge funds who rigged our free [market] for the benefit of Wall [Street] elites. The US [economy] should be transparent, open. This week’s coordinated corruption by a cabal of oligarchs shows it isn’t. I’ll help fix that,” Paxton tweeted Friday.
Today I’m launching an investigation into @RobinhoodApp, @discord, and hedge funds who rigged our free mkt for the benefit of Wall St elites.
The US econ should be transparent, open. This week’s coordinated corruption by a cabal of oligarchs shows it isn’t. I’ll help fix that.
— Attorney General Ken Paxton (@KenPaxtonTX) January 29, 2021
Paxton issued 13 Civil Investigative Demands (CIDs) to Discord, Robinhood Financial, Robinhood Markets, Robinhood Securities, Interactive Brokers, TD Ameritrade, TD Bank, E-Trade, WeBull Financial, Public Holdings, M1 Holdings, Citadel Financial and Apex Clearing Corporation, according to a press release.
“Wall Street corporations cannot limit public access to the free market, nor should they censor discussion surrounding it, particularly for their own benefit,” Paxton said in a statement. “This apparent coordination between hedge funds, trading platforms, and web servers to shut down threats to their market dominance is shockingly unprecedented and wrong.”
“It stinks of corruption,” he continued.
A class-action lawsuit was filed Thursday in the Southern District of New York against Robinhood. The suit alleges Robinhood violated its Customer Agreement by randomly removing GameStop and other companies from its platform without adequate explanation.
Removing the stock “in the midst of an unprecedented stock rise,” Robinhood “deprived retail investors of the ability to invest in the open-market and manipulating the open-market,” the lawsuit alleged.
Robinhood blocked users from buying GameStop and AMC among other companies after Reddit users drove the price of the stock to over $500 in pre-market trading. Hedge funds and other firms shorted the stock in recent months, meaning they bet the stock would go down. Their bets were ruined when Reddit users began buying the stock and increased the price of the shares by more than 600%.
Short sellers on Wall Street have lost more than $5 billion amid the rally, including just $1.6 billion last Friday, CNBC reported.
Robinhood CEO Vlad Tenev told CNBC’s Andrew Ross Sorkin Thursday that the trading platform stopped the trades to protect its financial requirements.
“Robinhood is a brokerage firm, we have lots of financial requirements. We have SEC net capital requirements and clearing house deposits. So that’s money that we have to deposit at various clearing houses. Some of these requirements fluctuate quite a bit based on volatility in the market and they can be substantial in the current environment where there’s a lot of volatility and a lot of concentrated activity in these names that have been going viral on social media,” he said.
Robinhood has faced backlash from politicians like Democratic Rep. Alexandria Ocasio-Cortez, but it’s important to note that Robinhood and other platforms do have financial obligations that must be met. (RELATED: White House Declines Additional Comment On Robinhood And Other Trading Platforms Blocking Stock Purchases)
The Depository Trust and Clearing Corporation (DTCC) helps settle and clear trades in the financial world. The stock market deals with risk by using clearinghouses, which process trades. Clearing brokers send the trades to the DTCC and post money to show that they will pay their settlement obligations since trades take up to two days to clear.
The DTCC became worried that retail investors who were buying GameStop at an overvalued price wouldn’t be able to settle their purchases two days later if the stock’s actual worth was reflected, according to Bloomberg Intelligence analyst Larry Tabb.
“It’s not really Robinhood doing nefarious stuff,” Tabb said. “It’s the DTCC saying ‘This stuff is just too risky. We don’t trust that these guys have the cash to be able to withstand settling these things two days from now, because in two days, who knows what the price could be, it could be zero’.”
“Look, it is not negotiable for us to comply with our financial requirements and our clearinghouse deposits. We have to do that,” Tenev said in a Bloomberg Television Interview, according to the report.
On Thursday the DTCC demanded more collateral from member brokers, according to Bloomberg. While brokerage executives scrambled to come up with the funds, Robinhood’s reaction was to limit the trading of the stocks, with TD Ameritrade, E*Trade and others taking similar action, according to Bloomberg.
Webull Chief Executive Anthony Denier said Apex Clearing Corporation, the platform’s clearing firm, notified him Thursday that Webull needed to stop any new positions in certain stocks or else Apex wouldn’t settle the trades, according to The Wall Street Journal (WSJ).
Denier said it was a “domino effect” in which the industry was grappling with whether “customers could pay for the stocks they had to buy to cover their short positions,” according to the WSJ.
“If [they] are not able to pay to cover their short positions, someone else is going to have to pay for that purchase,” he said, according to the report. “And if their clearing firm fails and there’s not enough collateral in the account to cover the purchase, that trade fails and will cascade into multiple trades with multiple customers.”
Limited trading has since resumed on both Webull and Robinhood for Gamestop, AMC and other stocks.