Robinhood's Gamble: Platformization, Market Power, and the Quest for Antitrust Modernization
Article by: Alex Hyndman
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Robinhood's Gamble: Platformization, Market Power, and the Quest for Antitrust Modernization
In the digital age, the intersection of technology, market power, and regulatory oversight has formed a complex set of challenges for modern antitrust law. The story of Robinhood—a platform that promised to "democratize finance for all"—provides a compelling case study in this evolving landscape. This article aims to dissect the intricacies of Robinhood's role within the broader context of platformization, focusing especially on the events of January 2021, when the platform restricted trading on “meme stocks” such as GameStop. The saga serves as a case study for understanding these dynamics and anticipating the future of antitrust law. As such, this analysis aims to provide our perspective on the legal implications of such events.
The dawn of a new era in finance, or an old dog learning new tricks?
Founded in 2013, Robinhood quickly became the vanguard of financial democratization, offering a user-friendly interface and no-fee trading policy that appealed to a new generation of investors. By removing traditional barriers to entry, it amassed a broad user base, many of whom were participating in the stock market for the first time. Indeed, it was credited with opening up the market to the public, and breaking down barriers. However, Robinhood's decision in January 2021 to halt purchases of certain volatile stocks, including GameStop and other “meme” stocks boosted by a grassroots movement on Reddit and other platforms, exposed the complex relationship between digital platforms and traditional financial entities, and raised questions about digital platforms’ immense power in ostensibly democratized markets.
The GameStop saga unfolded as retail investors, mobilizing through social media, initiated a short squeeze that inflicted significant losses on hedge funds that had bet against the stock. Robinhood's abrupt decision to restrict trading on these stocks was a turning point that shook its user base, revealing a reality marred by conflicting interests and power imbalances. This move, which Robinhood claimed was to manage risk, was perceived by many as a betrayal, favouring institutional behemoths over the individual investors Robinhood claimed to empower.
To explain this, one need not look any further than Robinhood’s balance sheet. A critical examination of Robinhood's revenue streams sheds light on its dependency on traditional power brokers. The platform's practice of selling order flow to firms like Citadel Securities—a sister company to Citadel LLC, which was significantly exposed to the GameStop short squeeze—was particularly contentious. This practice accounted for a substantial portion of Robinhood's earnings and highlighted a potential conflict of interest that could raise regulatory eyebrows, especially when such decisions affect market dynamics and fairness.
Implications for competition law
The events surrounding Robinhood during the GameStop episode raise several antitrust concerns. The core issue is whether Robinhood's actions constituted market manipulation or whether they were a legitimate exercise of a platform's discretion to manage risk. Robinhood's dual role as both a marketplace for traders and a gatekeeper with the power to control market access puts it at the center of antitrust discussions related to market power and control over essential trading infrastructure.
Principles of competition law generally guard against practices that harm consumer welfare, stifle competition, or consolidate power to the detriment of market health. The GameStop incident calls into question how these principles apply when a platform's decision—possibly influenced by its financial ties—impacts market dynamics and consumer trust.
Regulatory innovation
The response to Robinhood's actions and similar incidents has spurred a regulatory response. In the US, Lina Khan's appointment as chair of the Federal Trade Commission (FTC) marked a paradigm shift in antitrust enforcement, reflecting a movement towards a broader interpretation of market dynamics and power structures.
Under Khan's direction, the FTC has adopted a more holistic view of competition law, considering factors beyond consumer prices, such as market structure and the potential for anti-competitive practices to hinder innovation and consumer choice. This perspective was evident in the FTC's 2021 investigation into past acquisitions by tech giants, assessing the long-term impacts of market consolidation and the potential stifling of emerging competitors.
In the EU, the
In Canada, collaborations between the Officer of the Privacy Commissioner and the Competition Bureau signify a recognition of the interplay between consumer privacy and market competition. Data privacy, often overlooked in traditional antitrust analysis, is increasingly seen as an integral factor in the digital economy, where personal data is a key competitive asset. This collaboration came about in response to a paper by the Competition Bureau which, among other things, envisioned an expanded and more flexible competition law paradigm designed to respond to the threats posed by the digital economy and platformization. The Competition Act was amended significantly in 2023, and continues to be the subject of spirited debate. Amid the uncertainty and rapid change wrought by platformization, one thing is for certain: competition law in Canada and globally is in the midst of an identity crisis, and it is increasingly likely that the response will be a dramatic reform to the Competition Act. This may include a fundamental shift away from post-hoc corrective regulation toward an ex-ante framework geared toward identifying platforms as gatekeepers and treating them as such, much like the EU has done with the Digital Markets Act. It may also include a much more skeptical view of mergers and a lower threshold for mergers and acquisitions, to take into account the data-driven acquisitions that too often fly under the radar. For smaller startups seeking an exit via acquisition, it would be prudent to keep competition law considerations on the radar – a concern that used to solely be the purview of much larger operations.
Takeaways for legal practitioners
The transformation of antitrust enforcement necessitates that legal professionals adopt a forward-thinking approach. In counseling clients, it is paramount to account for the multifaceted nature of platform governance, the implications of legacy financial systems, and the ever-evolving regulatory landscape.
Advisors must stay ahead of the curve, acknowledging that the digital economy's lifeblood – data – is a critical competitive component. Strategies must reflect a nuanced understanding of data control, privacy, and the broader implications of platform actions on market fairness.
As we continue to witness the metamorphosis of market power in the digital age, our firm remains committed to providing clients with the legal foresight to navigate these complex waters, ensuring that innovation and competition thrive in a fair and regulated digital market.