US prosecutor investigates online brokers and hedge funds in Gamestop rally

January 30th, 2021, 5:30 p.m.

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The Gamestop rally has a legal dimension. It is suspected that online brokers like Robinhood have colluded with hedge funds to stop the Wallstreetbets traders.

Ken Paxton is the attorney general for the state of Texas. He demands information from online brokers like Robinhood, Citadel and a number of others about the reasons that led to the suspension of trading in small stocks like those of Gamestop and others.

Technical problems of the broker just advanced?

As is well known, Robinhood initially suspended trading completely on Thursday, then resumed it on Friday, but limited the number of Gamestop shares to be acquired to one share per trader. The US Securities and Exchange Commission had already intervened beforehand to focus on the processes surrounding the price explosions.

Paxton has a serious suspicion: “It stinks of corruption.” In his opinion, it could be that online brokers and hedge funds have illegally colluded to end the run on the Gamestop shares. The funds are said to have tried – so the suspicion – to secure their market dominance and to limit their losses, which in the meantime had been put at up to 20 billion US dollars.

US Congress announces hearings

Paxton wants that not accepting. Wall Street companies should not restrict public access to the free market for their own benefit, the prosecutor said. In fact, the tough restrictions introduced by online brokers for small investors initially led to a 44 percent drop in the price of the Gamestop share.

After massive criticism – especially from US politics – the online brokers withdrew their restrictions to varying degrees. This led to the fact that Gamestop papers rose by 100 percent in pre-trading on Friday and ultimately closed with a plus of 68 percent.

But that does not end the matter. In addition to Paxton, the New York attorney general Letitia James has announced that she will start investigations. Both chambers of the US Congress have since announced hearings on the proceedings.

German authorities and politicians also want to enforce retail investor rights

There were also reactions in Germany. “Trading platforms must be open to all market participants,” demanded the FDP finance politician Florian Toncar to Reuters. It could not be that small investors would be excluded from trading in a volatile phase, while large hedge funds would continue to have market access.

For Fabio De Masi of the Left, the process is nothing less than a scandal. In his opinion, the trading restrictions show “how sensitive financial sharks react when a swarm throws them a spanner in the works.” He demands the intervention of the stock exchange regulator.

It has already intervened, says it is observing the market and is currently getting an idea of ​​which market abuse constellations could come into question. The Federal Financial Supervisory Authority (Bafin) also confirms that it has received a large number of complaints from private investors about alleged technical malfunctions and the suspension of certain trading papers at the Berlin online broker Trade Republic in the past few days.

The Bafin has now “emphatically” requested to adhere to the requirements and to provide customers with all services without disruption. Trade Republic also temporarily suspended trading on Thursday – allegedly to protect investors, as the company tried to explain verbatim in a letter.

The users of the broker services do not want to let the matter rest either. Already 26,000 Robinhood traders are said to have come together in a class action lawsuit against the app broker. More than 4,000 complaints are said to have been filed with the SEC by Friday afternoon. The promised to provide “fair, orderly and efficient markets”.

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