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Schwab, TD Ameritrade, Interactive Brokers Sued Over Trading Restrictions

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Large brokerages including Charles Schwab, Interactive Brokers and TD Ameritrade are facing lawsuits after placing some trading restrictions on certain types of transactions involving GameStop and other stocks amid extreme volatility.

Robinhood, Schwab, Interactive Brokers Group and TD Ameritrade were hit Thursday with a class-action lawsuit in Colorado for what the suit alleges is “purposefully, willfully, and knowingly removed numerous stocks … from their trading platforms in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market, thereby manipulating the open-market.”

The lawsuit also states that actions taken by these brokerage firms created “massive losses” for retail investors.

However, Charles Schwab insists that neither it nor TD Ameritrade “halted buying or selling ANY stocks this week,” according to a statement released on Friday. “Neither firm restricted buying or selling basic options.”

Both firms did, though, “adjust margin requirements on select stocks to ensure clients had sufficient assets to pay for stock purchases … and also restricted certain advanced options strategies,” Schwab explained.

Other Suits

Another lawsuit, filed Thursday in California Central District Court against Robinhood, TD Ameritrade and Schwab, contends that the brokerages “conspired to impose a coordinated restraint on stock trading that resulted in injuries to Robinhood and TD Ameritrade customers.”

A third suit, filed in the District Court for the Northern District of Illinois against Robinhood, Schwab, TD Ameritrade and Melvin Capital Management, a hedge fund that was aggressively shorting the stocks, also contends that the firms “conspired to impose a coordinated restraint on stock trading that resulted in injuries to Robinhood and TD Ameritrade customers.”

The suit brought in Colorado District Court was on behalf of Chance Daniels. It states that the brokerages halted trading on their platforms “in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market, thereby manipulating the open-market.”

In so doing, the brokerages “created a one-way buy-sell situation by which the only option of retail investors who had already purchased the above securities, and others, to sell/liquidate their holdings, thus depriving these stocks of buy liquidity to counter selling pressure by permitting purchase of the equity to take place.”

The end result: “all of these equities, and Plaintiff and other class members that held them suffered massive losses to their equity shares.”

Taking advantage of this situation, the lawsuit states, “hedge funds and equity firms performed a series of vertical ladder attacks against these equities throughout the day in order to hunt and strike stop loss orders and margin calls.”

Numerous retail investors, the lawsuit continued, “were forcefully stopped out of their positions by Defendants at incredibly low prices as a result of these attacks, suffering massive financial losses.”

The Context

Robinhood has been hit with numerous suits since the GameStop trading incident, which is part of a battle royal being waged between day trading investors bullish on GameStop stock and hedge funds that have shorted the stock.

“I predict a book on this, if not more, along with a movie,” Allianz Chief Economic Adviser Mohamed El-Erian tweeted FridayWhat is hard to call at this stage is the ending … not just for those directly involved but also for the broader asset prices, market structure, regulation & financial stability.”

U.S. stock markets have gotten caught up the GameStop drama, which eventually spilled into other retail stocks including AMC and Blackberry and led brokerage firms like RobinhoodInteractive BrokersE-Trade and Webull Financial, to restrict some trading in GameStop and several other stocks this week, according to Wall Street Journal and Bloomberg reports.

In the meantime, hedge funds were selling other stock favorites like Apple, Netflix and Amazon to make up for their losses. Other factors affecting the markets this week included weak U.S. economic growth for 2020 and mixed news on vaccine efficacy.

The SEC announced it was “closely monitoring” the trading situation. The restrictions slashed gains in GameStop and some other stocks, but once they were lifted, the rallies returned.

Asked if the recent activity in GameStop shares bothered him, El Erian told CNBC on Thursday: “I am troubled because it is enabled by very distorted financial conditions.”

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