Traders revive antitrust complaint against Robinhood and Citadel Securities
Several months after the defendants in the antitrust tranche of a short squeeze litigation have managed to secure dismissal of the complaint against them, the traders have filed an amended complaint. The document, seen by FX News Group, names only Robinhood and Citadel Securities as defendants.
On January 20, 2022, Plaintiffs Angel Guzman, Burke Minahan, Christopher Miller, and Terell Sterling, on behalf of themselves and all others similarly situated, brought Amended Class Action Complaint against Defendants Robinhood Markets, Inc., Robinhood Financial LLC, and Robinhood Securities, LLC (collectively, “Robinhood”) and Citadel Securities LLC for violations of Section 1 of the Sherman Act, 15 U.S.C. § 1.
According to the plaintiffs, this case involves a collusive agreement to restrict individual investors from exercising control over their trades and trading accounts. Robinhood and Citadel are accused of having hatched an anticompetitive scheme to restrict Retail Investors’ access to specific securities in the stock market, to suppress the prices of these securities, and to prevent the market from operating freely and fairly.
The complaint further alleges that Robinhood and Citadel entered into an illegal agreement to implement this scheme and committed a series of overt acts in furtherance of the conspiracy. The agreement was implemented, effective and caused its intended purposes, causing hundreds of millions in dollars in damages to the Plaintiffs and the Class they represent.
According to the traders, Robinhood and Citadel had developed an important and lucrative relationship. The relationship was crucial to their respective businesses. They implemented the scheme to protect each other: Defendants allegedly conspired to prohibit Retail Investors from purchasing the Relevant Securities to save Citadel from hemorrhaging losses due to its accumulation of large short positions, and to save Robinhood’s business model, which depends predominantly on the lucrative order flow payments that Robinhood receives from Citadel.
The plaintiffs claim that Robinhood and Citadel were in a collusive agreement which prevented the market from operating in a competitive manner as it would have absent the restraint. As such, Defendants’ agreement introduced price artificiality by preventing the trading price from reflecting the supply and demand conditions that would have otherwise prevailed in a competitive market. Defendants allegedly harmed competition by leveraging each other’s market power in their respective markets to limit output (trades), reduce the quality of order execution (and thus increase the quality-adjusted price), and induce artificial prices for relevant market securities for their own benefit.
This antitrust injury allegedly resulted in damages to Retail Investors, who could not avail themselves of the trading opportunities they would have taken advantage absent Defendants’ conduct.
The complaint says that payment for order flow (PFOF) is Robinhood’s primary source of revenue. Indeed, Robinhood derives as much as 80% of its revenues from payment for order flow. That revenue exceeds hundreds of millions of dollars on an annual basis. Without PFOF income, Robinhood would not survive.
Citadel is crucial to Robinhood’s success and business prospects. Robinhood’s entire business model is built around the PFOF revenue it derives from market makers like Citadel. Citadel alone contributed an astonishing 43% to Robinhood’s PFOF revenue, over $326 million, in the first quarter of 2021. Indeed, Vlad Tenev, Robinhood’s founder and CEO, acknowledged in Congressional testimony that Robinhood’s PFOF relationship with Citadel is Robinhood’s primary source of revenue.
Leading up to January 27, 2021, based on their research and observations, the Retail Investors, primarily through Robinhood, invested in certain stocks—GameStop (GME), AMC Entertainment (AMC), Bed Bath & Beyond (BBBY), BlackBerry (BB), Express (EXPR), Koss (KOSS), Nokia (NOK), Tootsie Roll Industries (TR), and Trivago NV (TRVG) (the “Relevant Securities”)—that they believed would increase in value and serve as good investment opportunities.
As more Retail Investors bought the Relevant Securities through Robinhood, those orders were routed to market makers like Citadel. Citadel took the other side of the buy orders placed by the Retail Investors, i.e., Citadel sold the Relevant Securities short to complete the routed Retail Investors’ orders. As Citadel took the other side of more and more buy orders, it acquired a massive short position in the Relevant Securities in excess of a billion dollars.
As the Relevant Securities increased in value, due in large part to Retail Investors’ purchases of the Relevant Securities, Citadel Securities exposed itself to potential losses of several billion dollars. As Retail Investors and others continued to purchase the Relevant Securities, Citadel Securities and unnamed co-conspirators were caught in a classic “short squeeze.”
A “short squeeze” occurs when a stock or other asset rises sharply in value, distressing short positions. Short selling investors are faced with a rapid increase in the shorted asset’s value, exposing the short seller to increased and theoretically limitless loss.
Faced with the threat to its short positions posed by the nascent short squeeze, Citadel allegedly leveraged its PFOF relationship with Robinhood to form and implement an anticompetitive scheme to halt trading for essentially all Retail Investors.
The traders further allege that Robinhood could not take the risk of routing its rapidly increasing buy orders to a different market maker, or to the open market, because its relationship with, and revenue stream from Citadel was critical to its survival. Robinhood and Citadel are accused of having conspired, colluded, agreed, and acted in concert to cut off access to Retail Investors’ ability to buy the Relevant Securities and thereby artificially suppressed the prices of millions of dollars of securities that would have otherwise traded freely on the stock market.
On January 28, 2021, Robinhood disabled all buy features for the Relevant Securities on its platforms thereby stripping the demand-side of the market and halting the price appreciation in the Relevant Securities. Retail Investors had no option but to sell or hold shares of their Relevant Securities.
The traders allege that by forcing them to sell their Relevant Securities at lower prices than they otherwise would have sold, Robinhood and Citadel caused damage to the traders.
The defendants are alleged to have artificially constricted the price appreciation of the Relevant Securities and reduced the price of the Relevant Securities that Retail Investors either sold or held below the prices that they would have otherwise obtained in a competitive market free of collusion. The injuries caused by Defendants continued for several days and weeks.
The plaintiffs conclude that, as a result of Defendants’ illegal conspiracy, the plaintiffs and the Class they represent sustained hundreds of millions of dollars in damages.