The ongoing Robinhood saga gives the public a view of the operations of brokerage industry and trading desks today – operations that have their roots in centuries of trading of financial instruments. Partner David Bissinger teamed with David Port of TDI Capital Advisors for a deep examination of these issues in the Lawyer Monthly article “The Bucket Shops of the ‘Meme’ Stock Era.”
Bissinger and Port review the history of market bubbles and crashes that led clearinghouses and regulators to impose the “circuit breakers” on market volatility that Robinhood used in halting trading in GameStop and other “meme” stocks in late January 2021. They note that many of these circuit breakers limit the kind of trading that some traders contend have “democratized” stock trading.
As they observe in the article, “[r]egardless of one’s opinions of whether Robinhood should have encouraged this kind of trading through its model of democratizing stock trading, Robinhood must comply with these regulatory and contractual obligations to halt trading in stocks whose extreme volume and volatility put Robinhood’s regulatory solvency in jeopardy.”
According to Bissinger and Port “[t]hese rules have existed for decades because history is littered with instances where extreme market volatility has put investment firms, and thus investors, at risk. Inexperienced traders fail to appreciate these market dynamics because they occur sporadically in markets.” Bissinger and Port conclude that “[t]raders large and small must learn, among many other lessons, to ‘beware the crowded trade’ – that is, avoid the memes.”
The full article, “The Bucket Shops of the ‘Meme’ Stock Era: Robinhood, ‘Gamification,’ and the Supposed New ‘Democratisation’ of Trading,” is available here. Lawyer Monthly is a UK-based news publication featuring legal and business content of global interest.