Brokerages are permitted broad discretion in limiting trades to provide flexibility in handling unusual situations like technical glitches or mechanical errors or just mistakes, said Columbia Law School professor Joshua Mitts, who specializes in corporate law.
“There is no obligation that a broker-dealer has to unconditionally accept orders to to buy, sell or short sell securities,” said Cam Funkhouser, a former executive at the Financial Industry Regulatory Authority, a Wall Street-backed regulator that oversees broker-dealers. “If they do accept orders, it is expected that the transaction is executed and settled in compliance with the applicable rules,” said Funkhouser, who worked at Finra for 35 years and oversaw its national fraud-detection office.
“There is no financial incentive for a broker dealer or clearing firm to be non-compliant with trading and settlement rules as there is significant regulatory risk in non-compliant behavior,” he said.
‘Pretty Broad’
Timothy Blood, a partner with Blood Hurts & O’Reardon in San Diego, who has represented investors in disputes with brokerages, said user agreements “tend to be pretty broad” in their ability to prohibit trading, as they can decline to work with anyone just like any other business.
Still, user agreements aren’t always an absolute protection for brokerages.
“It’s going to depend on the particular situation that arises,” Blood said.
There might be liability if a brokerage allows trades by some clients but not others, especially if the one being denied needs access to the market to complete a longer-term strategy with additional trades, Blood said. “If a long-term plan gets cut off midstream, the clause helps Robinhood but won’t be the last word on the issue,” he said.
While Robinhood’s customer agreement clearly states that it can suspend trading at any time, it does raise questions about whether the platform treated some users differently than others, especially after cases in the past decade of market manipulation by short sellers that disadvantaged retail investors, and said Mitts, the Columbia Law School professor.
“When hedge funds are going to lose from a trading suspension, they don’t face any lockup like this, any suspension, any halt at the retail level,” Mitts said. “But when retail investors find themselves locked in, they find themselves unable to exit the trade.”
This article was provided by Bloomberg News.