In re January 2021 Short Squeeze Trading Litigation, 105 F.4th 1346 (11th Cir. 2024)

By Eric Rivas and Liam Grah

On June 26, 2024, the Court of Appeals for the Eleventh Circuit affirmed the dismissal of an antitrust suit brought against the retail brokerage firm, Robinhood, and one of its market makers, Citadel, alleging a conspiracy to deflate the price of certain securities. In re Jan. 2021 Short Squeeze Trading Litig., 105 F.4th 1346 (11th Cir. 2024). Plaintiffs brought a claim under § 1 of the Sherman Act arguing that Robinhood restricted its users’ ability to sell “meme stocks” in order to reduce the price of the relevant securities and protect Citadel from massive losses it would otherwise incur because of its short positions on the stocks. Id. at 1349. The Eleventh Circuit’s decision reminds us that it does not suffice for an antitrust plaintiff to allege anticompetitive harm in any market; rather, that alleged harm must result in a relevant market in which a defendant competes.

Background

Robinhood is a retail brokerage firm that allows customers to buy and sell securities in Robinhood’s mobile application. Robinhood routes customers’ trade orders to market makers, including Citadel. Id. at 1350. The market makers then execute the orders, either by routing the order to a stock exchange or by taking the other side of the transaction and filling the order itself. Id. Robinhood relies on the symbiotic relationship it shares with its market makers to maintain profitability. Id. at 1351–52.

In the weeks preceding January 28, 2021, many retail investors took long positions in GameStop (“GME”), AMC Entertainment (“AMC”), and various other meme stocks, so-called because of their popularity in online trading forums. Id. at 1352. The long positions caused these securities’ prices to skyrocket. Id. For example, between January 21 and 27, the price of GME went from $43.03 to $380. Id. The price surge exposed Citadel and institutional investors to massive potential losses because they had taken short positions on the meme stocks. Id.

On January 28, 2021, in response to the meme stock surge and perceived market volatility, Robinhood removed its users’ ability to purchase GME and AMC shares. Id. Though many of the restrictions were lifted the next day, the stock prices of GME and AMC fell dramatically after the purchase restrictions were imposed. Id. at 1353. Plaintiffs claimed that Robinhood’s restriction caused the collapse of the relevant securities’ prices. Id. While Robinhood prevented its customers from selling their meme stock positions, institutional investors had exclusive access to alternative “dark pool” security exchanges. Id. Citadel benefited from the meme stocks’ price reduction by selling its short positions in dark pools, thereby avoiding losses it would have faced if prices had not declined. Id. Plaintiffs alleged that Robinhood restricted trading to maintain its profitable relationship with Citadel and protect Citadel from losses on its short positions. Id.

Procedural History

Plaintiffs sought to represent a class of Robinhood users allegedly injured by Robinhood’s meme stock purchase restriction. Id. at 1350. Plaintiffs alleged that Robinhood, Robinhood’s subsidiaries, and Citadel conspired to restrict trading of the meme stocks in violation of § 1 of the Sherman Act. Id. at 1353. The district court dismissed Plaintiffs’ antitrust claim on the grounds that they failed to allege a conspiracy between Citadel and Robinhood, and even if they had, that Plaintiffs did not plausibly allege that Defendants unreasonably restrained trade in a relevant market. Id. at 1354. Plaintiffs appealed to the Eleventh Circuit. Id.

Discussion

The court of appeals assumed, without deciding, that Plaintiffs successfully alleged a conspiracy and considered only whether they plausibly alleged an unreasonable restraint of trade. Id. at 1355.

Plaintiffs alleged two relevant markets: (1) the “No-Fee Brokerage” market and (2) the “Payment for Order Flow” market. Plaintiff alleged that Robinhood operated in the first market, which consists of no-fee brokerages that “offer a user-friendly mobile app to retail investors to place orders to buy and sell stocks” and “receive payment for order flow from market makers.”? Id. at 1351 n.4.? Citadel allegedly operates in the “Payment for Order Flow” market, which consists of market makers “that pay brokerage firms to route their clients’ trades to that market maker.”? Id. at 1351 n.5.?

In evaluating whether Plaintiffs alleged harm in either market, the court observed that Citadel and Robinhood are not competitors because the markets in which they allegedly operate are vertically related. Id. at 1356. Therefore, the court applied the rule of reason. Id.

The court found that Plaintiffs failed at the first step of the rule of reason because they did not plausibly allege anticompetitive effects in either market. Id. The court reasoned that Plaintiffs did not claim competitors in the No-Fee Brokerage market raised prices to use their apps, that they reduced the number of services offered to customers, or that the quality of services in the No-Fee Brokerage market suffered because of the conspiracy. Id. at 1356–57. Plaintiffs also failed to plausibly allege anticompetitive effects in the Payment for Order Flow market. Id. at 1356.

The court also rejected Plaintiffs’ argument that Robinhood’s purchase restriction reduced supply of the meme stocks and caused the price collapse. The court noted that “[w]hile these may be anticompetitive effects, they are not anticompetitive effects in a relevant market defined by [Plaintiffs’] Amended Complaint.”? Id. at 1357. Even if Plaintiffs identified the stock market as a relevant market, some courts hold that stock market transactions fall outside of Section 1 of the Sherman Act. Id. at 1357 n.12 (noting that the Third Circuit has held that transactions in a particular stock fall outside of Section 1). Because Plaintiffs failed to allege anticompetitive harm in either alleged market, Plaintiffs did not plausibly allege an unreasonable restraint of trade under the Sherman Act. Id. at 1357. Therefore, the Eleventh Circuit upheld the district court’s dismissal of Plaintiffs’ complaint. Id. at 1358.