Is it legal for a stock broker to restrict trading on a specific stock?

Question

Brokers like Robinhood are restricting purchases of GameStop stock driving the price down. Is this market manipulation and against the law? Or does the SEC permit this? You can find an article talking about this here,

• Robinhood blocks new purchases of GameStop stock
• Robinhood, TD Ameritrade restrict trading of GameStop, AMC stock

Answer 1

Brokers are not required by law to trade every available stock. They are ultimately private business people, not public services.

Also, when there is circumstantial evidence that illegal securities fraud and market manipulation is underway in the shares of a particular security, as in the case of GameStop, there may be more liability exposure from allowing the broker's customers to trade in the stock, potentially exposing them to securities fraud, than there is to barring trading in the stock.

Also relevant: "Nasdaq CEO Friedman says the exchange will halt trading in a stock if they link unusual activity to social media chatter.":

Friedman said the Nasdaq's role as a "self-regulatory organization" is to make sure activity in the market is "legitimate" and to root out manipulation in the market. She did not detail what kind of technology the Nasdaq uses to "evaluate social media chatter," but she said if the Nasdaq can match unusual trading with social media activity, the exchange will halt the stock and potentially engage with the SEC to evaluate and investigate.

One illegal market manipulation activity that the SEC goes after is a "pump-and-dump" scheme. An investor buys a stock, and then publicly "pumps" it, by spreading a rumor or another catalyst for the stock go up. Other people see the rumors and buy the stock, causing the price to rise. The person who originated the rumor sells the stock to them at a higher price in a "dump," and takes the profits. Friedman said the Nasdaq collaborates with the FINRA and SEC to identify and investigate pump and dump schemes, but she said it's unclear whether the current Reddit activity qualifies as a pump and dump scheme.

"Regulators kind of have to catch up with the technology that's now available," Friedman said.

Background on the economic and regulatory motivators for the action taken can be found here:

[T]here is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.