In January 2021 Short Squeeze Trading Litigation (No. 22-11873), the Eleventh Circuit affirmed the dismissal of a case brought by retail investors alleging that Robinhood, a zero-fee stock brokerage platform, conspired with Citadel Securities, a high-frequency trading firm and short-seller, to block trading in “meme stocks” like GameStop, AMC Entertainment, and Bed Bath & Beyond.  Although the investors alleged that prices fell in the meme stocks they owned, the court held that those losses were not “anticompetitive effects” arising in the relevant antitrust markets the investors pleaded in their complaint.

The investors’ suit stemmed from an alleged January 2021 “short squeeze” on certain “meme stocks,” which were typically distressed brick-and-mortar businesses popularized in online discussion forums.  Prices and trading volumes for those stocks, frequently bought on platforms like Robinhood, rose rapidly.  According to the investors, that caused significant losses to institutional investors like Citadel that held large “short” positions, betting that the prices of those stocks would fall.  Allegedly, these events prompted Robinhood to temporarily stop trading in these stocks at the behest of Citadel, Robinhood’s primary source of revenue.  Meme stock prices then fell.

According to the investors, the alleged agreement between Citadel and Robinhood violated the antitrust laws.  However, because the investors were asserting a rule of reason claim, the investors had to plead a “relevant antitrust market” within which harm to competition allegedly occurred.  Their complaint alleged two relevant antitrust markets:  (1) a downstream  “No-Fee Brokerage Trading App Market,” consisting of zero account-minimum, no-fee brokerages, like Robinhood; and (2) an upstream “Payment for Order Flow Market,” which consists of high-frequency traders, like Citadel, that pay brokerage firms to route their clients’ trades to them. 

The Eleventh Circuit held that the investors failed to plead that either of these two relevant markets experienced anticompetitive effects.  As to the No-Fee Brokerage market, the investors did not allege higher prices (e.g., trade commissions), lower output, or lower quality across the many brokerage platforms available for trading.  And as to the Payment for Order Flow Market, the investors’ complaint contained no allegations about competition among high-frequency traders whatsoever.  Instead, the investors alleged only that “the reduction in the stock price and supply of the relevant securities are the anticompetitive effects” from the alleged conspiracy.  The court rejected that suggestion because the meme stock price declines were “not anticompetitive effects in a relevant market defined by their Amended Complaint.”  That pleading failure alone warranted dismissal.  

The Eleventh Circuit’s decision shows that courts will closely scrutinize an antitrust complaint to ensure the plaintiff’s allegations of anticompetitive effects align with their pleading of the relevant antitrust market.