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Comment by slg | Hacker News Reader

I'm not sure disallowing buying this stock is worthy of a lawsuit. However forcibly closing people's positions who already are long on GME like some are reporting on Twitter[1] certainly seems like a great reason to be sued.

[1] - https://twitter.com/joemccann/status/1354859879337320452

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Imagine signing up for a broker and then being told you can't buy TSLA or DIS because its been doing too well - are they even a broker at all?

Does a broker have a legal obligation to allow you to purchase any stock? I am genuinely asking as IANAL. I can't go into an Apple Store and demand they sell me a Google Pixel. It seems like these places should have every right to choose what services they offer or products they sell.

I wouldn't do business with Robinhood for a number of reasons that go back before this recent spat of issues, I am just not sure preventing purchasing GME is the worst aspect of this.

Are they entitled to prevent people from buying the shares you hold? If people can't buy them, this obviously causes the price to fall. They are making the price of what you hold fall...they deserve to be sued good and hard for this.

>Are they entitled to prevent people from buying the shares you hold?

So if I am long on a stock that gets delisted from an exchange, can I sue that exchange because they are making it more difficult for people to buy that stock?

How is this related at all to the broker question? Exchanges and brokers are completely different concepts.

Because the logic that comment used for a lawsuit was as follows:

>They are making the price of what you hold fall...they deserve to be sued good and hard for this.

That logic applies to a number of entities and not just brokers. If I can sue a broker for this reason, can I sue anyone for that reason?

That’s not how laws work. Just because you personally see a way it can be philosophically generalized or conceptually generalized does not mean laws apply the same to all generalizations. Brokers, exchanges, investment firms, banks, etc., all have specific legal obligations based on different types of fiduciary duty, different service offerings, etc. It can easily be the case that an exchange entity has a legal ability to deny access through delisting while a broker entity does not have the right to deny service in some particular scenario.

I am not saying what the case is for brokers today, but regardless, appealing to some notion of proof by contradiction because of generalizing a behavior is not a valid way to analyze the situation.

>It can easily be the case that an exchange entity has a legal ability to deny access through delisting while a broker entity does not have the right to deny service in some particular scenario.

I realize that. That previously quoted answer was in response to me asking "Does a broker have a legal obligation to allow you to purchase any stock?" Someone answered that with a broad response without referring to any laws. I'm not sure how that leaves me with a responsibility to do a full legal breakdown of the issue.

If your over-arching point is the legal system won't side with the RH users, I'm fine with that premise because I think "laws" are a meme, and the same powerful institutions screwing over the traders who went against them are the same ones who not only influence how laws are written but also enforced.

I thought you were saying in principle their was no basis for users to feel wronged by RH. But this is silly, because you and I both know without a shadow of a doubt that RH shut down buys to protect the underwater hedge funds. It's obvious to anyone with a brain. And I'm confident it's obvious to you. And would be obvious to any judge, jury or lawyer. But does it matter that its true? No. Is there some legal basis that would encompass "you can't shut down trading to protect some hedge fund that you are connected with". I'm certain there is, but it probably won't matter. Because "the law" and "rule of law" is a meme. Power is what matters. And the sovereign power decides what the law is... average joe traders don't have the power and hedge funds and finance in this case do.

I wouldn't have used that exact phrasing, but yeah that is my general premise. "It is obvious" is an argument that might work on Reddit, Discord, Twitter, or HN, but there needs to be some bigger connection for the law to act rather than they did something shady that benefitted someone they have a connection with and that shouldn't be allowed.

It is similar to a lot of the complaints in the wake of 2008. You can't just lock people up for seemingly unethical behavior. You need to find evidence that specific laws were broken. If no laws were broke we need to move on and create new laws to prevent it the next time.

"Does a broker have a legal obligation to allow you to purchase any stock?"

No, I have seen all sorts of seemingly arbitrary restrictions since I started investing (back in college), on everything from mutual funds to ETPs to penny stocks.

Framed another way, can a broker prevent the purchase or sale of stock to bias the asset's movement in a particular direction to benefit themselves or a friendly third party?

Of course not. This is any number of SEC violations

What kind of strawman is that? They let you buy GME until yesterday. Stop being intellectually dishonest.

They're allowing the stock to sell, they only disabled purchases. This will clearly make the stock go back down, benefiting Robinhood's investors over their users.

let's try and keep this in perspective and avoid jumping to wild conclusions based on someone tweeting a screen shot.

First, Robinhood does not make the market or fulfill the orders, so if their market-maker has no one selling a stock they have little option other than stopping people from making purchase orders. You need both sides for a liquid market.

Second, IF these are margin positions then it is not only allowed and legal but also typical for the broker lending on margin to close out the position unilaterally. IF these are cash positions it is a completely different story.

If their market makers are preventing people from selling a stock surely they must prevent customers from selling stocks, right? But you can freely sell the stock.

This is what's pissing me off. I had a tiny "fuck it" position on BB with a stop-loss that kicked in. Now I can't get back in at the lower price and the one way ban is likely why the stock fell under my sell price.

No warning from Robinhood on the current issue either or I would have pulled my sell order.

Forcibly closing under-margined securities positions is totally normal. In a cash account, it would certainly be suspect.

Preventing opening buys hurts everyone who is long -- including a large number of Robinhood customers -- by barring trades that would provide liquidity to sellers and thus dampen the sellers' stock impact. So essentially, Robinhood chose a course of action that disproportionately imposes losses upon its own customers.

The concept of price impact is part of the reason that stock buybacks are able to "return capital" to investors. Demand from buyers pushes prices upward.

No idea if that is a central argument of the case.

Every case I've seen where they've closed out a position, it was on margin, which makes it perfectly acceptable to do. I do not agree with Robinhood's actions today, but this is a very important distinction versus closing out a position that someone took out with cash.

The positions getting closed was a consequence of preventing people to buy id argue. They could have closed them anyway but probably at a higher price

It’s really kind of ironic. People are knee-jerk blaming RH for closing margin positions because they didn’t fully understand how they work and the risks involved. Simultaneously, the same people are blaming RH for stepping in the way of what very certainly would have turned into a bad trade for a lot of people.

I don’t take RH’s side but it’s hard to see a winning play for them, it’s damned-if-you-do-damned-if-you-don’t.

>People are knee-jerk blaming RH for closing margin positions because they didn’t fully understand how they work

People are typically given a choice to sell other assets, deposit more or close in these situations rather than getting their stock sold at the brief lowest possible price driven by the very broker closing the position. Also, typically it's only a portion that gets liquidated rather than everything on margin.

The lowest possible price is also the point where the value of your portfolio is lowest and the margin call is most severe. It is completely normal for brokers to immediately close positions when you are highly leveraged and the market is moving quickly on a direction which might leave your portfolio at a negative value - they don't want to be left holding the bag if you take too long to respond. Generally your broker will only give you time to correct things when volatility is low enough that things won't change over the next few hours.

Fair enough. If it was all margin calls from accounts bellow the limit that's acceptable but if they liquidated everything on margin that would still be pretty questionable.

Not that questionable when volatility is extreme. The risk that the price is dramatically lower when the market opens tomorrow may be too large, and they would rather not be stuck with their customers' debt when that happens.

People typically get a meal on an international flight, but not if they fly RyanAir.

If you run a super discount brokerage platform, you don’t have the luxury of reaching out to all your customers to find out what course of action they want to take.

I’m not sure if RH violated their own terms here, if they did then sure, they deserve a lawsuit. I suspect they didn’t, and this is just a case of people being in over their head.

That is not always the case, certainly not in modern times. If you have a full service broker and there appears to be sufficient time to contact you, they may do so and give you a chance to pick what to close out.

However, very few people use full service brokers. Everything is now automated. The best you can hope for is that the broker provides a mechanism prior to the need to close any position to signify which should be the last one hit to pay the margin loan. As a specific example, Interactive allows their clients to pre-select one holding as the absolute last one to close.

(edit spelling)

I agree with you. In general I think poorly for RH in several major aspects, but I'm not sure if most of the complaints here understand how a margin account works, nor how a broker - order house relationship creates a liquid market. There's definitely shennigans going on here but it's not obvious they are illegal. Hate the game not the player.

I wasn't aware of that aspect and that does change things. It still can be pretty shady though depending on the total borrowed on margin versus the total value of the stock owned. If someone borrowed $1000 on margin and bought stock that is now worth $2000, I'm not sure why Robinhood would have justification to sell off everything.

I doubt 99% of their users know the account is margin by default. Also on the surface looks like they disabled the option to 'downgrade' to a cash account.

It also seems pretty scummy to not make this very clear that they can sell without asking.

To a normal person this comes off really wrong (and really it is, let's be honest).

Completely agreed. Margin accounts are a strange, convoluted construct, and it was wrong for Robinhood to try and present them as easy or normal.

All brokers are mandated to provide the legal terms of the account and margin accounts include language concerning a) the risks and b) what options the broker has available should your account fall below their required margin (which might be higher than the regulatory minimum).

Brokerage accounts, mortgages, credit cards are not click-thru agreements. There is real money involved and real risk to both parties. Not reading the terms before signing and using is an unacceptable excuse for future loss or hardship.

So by that logic predatory lending is completely fine because they technically disclose their terms. Gotcha.

Just because something is in the fine print doesn't make it okay, especially if its marketing completely differently.

Also if Robinhood wins this, theoretically they can do the same to $AAPL, $MSFT, $AMZN , now how does the uber rich , fund managers, union funds, 401k etc etc would react? where does this stop. Its either a free trade market , or its not!

I guess the closed ones might've been only the positions on margin, which might be legal to close at their discretion?

Of course it is because that directly affects current holders of the shares. They're closing off the market from people buying the asset these people hold. Sure you can sell, but what does that have to do with the fact they are causing your asset to fall in value due to direct manipulation?

If this wasn't a corrupt rigging to benefit the hedge funds, they wouldn't be doing it.

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