Short Selling, Retail Investors, Hedge Funds, Restricted Trading, Collateral Requirements, Brokers, Robinhood, Short Squeeze, Investor Protection, Public Trading, Equity Markets
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 one- week 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?
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.
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).