Robinhood faced lawsuits, regulatory investigations, and a loss of trust after it stopped customers from buying GameStop stock in January 2021

On January 28, 2021, Robinhood restricted trading on GameStop and other volatile stocks, preventing customers from buying but allowing them to sell. The move came after the stock's price surged due to retail investor activity coordinated on social media. Robinhood said it made the decision to manage risk, but customers and lawmakers saw it as unfair market manipulation. The company faced when ready backlash, multiple lawsuits, a congressional hearing, and investigations by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

The restrictions lasted only a few days, but the damage to Robinhood's reputation was lasting. The incident exposed how the company's business model — making money by selling customer order data to large trading firms — created a conflict of interest when those firms faced losses. It also raised questions about whether a retail brokerage should have that much power over market access.

Key Takeaways

  • Robinhood restricted buying on GameStop and other stocks on January 28, 2021, citing risk management, but the move was widely seen as protecting its financial partners at the expense of retail traders.
  • The company faced multiple lawsuits from customers, a congressional hearing, and regulatory investigations by the SEC and FINRA that lasted years.
  • Robinhood settled a lawsuit with customers for $70 million in 2022 without admitting wrongdoing, and paid a $70 million fine to FINRA in 2023.
  • The incident led to changes in how Robinhood operates, including going public and facing stricter scrutiny from regulators over order routing practices.
  • Other brokerages also restricted trading that day, but Robinhood bore most of the public anger because it had marketed itself as democratizing finance for retail investors.

Why Robinhood restricted trading that day

Robinhood said it restricted buying to manage risk and protect the firm's financial stability. When customers buy stocks on margin (borrowed money), brokerages must post collateral with clearinghouses — the institutions that settle trades behind the scenes. GameStop's price was moving so fast and so dramatically that clearinghouse collateral requirements spiked. Robinhood said it did not have enough cash on hand to meet those requirements if it kept accepting buy orders.

The company's critics argued this explanation did not hold up. Robinhood had access to credit lines and could have raised capital. More importantly, other brokerages like Fidelity and Charles Schwab did not restrict trading that day, even though they faced the same clearinghouse pressures. The timing also looked suspicious: Robinhood's restrictions came after Citadel Securities, a major market maker that buys Robinhood's customer order data, faced massive losses on its own GameStop positions.

Robinhood later acknowledged in SEC filings that it could have handled the situation differently, but it never admitted the decision was wrong. The company maintained that it acted to prevent a systemic risk, though regulators and lawmakers remained unconvinced.

The lawsuits and settlements

Within days of the trading halt, customers filed class-action lawsuits against Robinhood in multiple states. The lawsuits claimed the company had breached its duty to customers, violated securities laws, and acted in bad faith. Some suits also named Citadel Securities and other market makers as defendants, arguing they had pressured Robinhood to restrict trading.

In June 2022, Robinhood agreed to pay $70 million to settle a class-action lawsuit brought by customers who tried to buy GameStop, AMC, and other restricted stocks. The settlement did not require Robinhood to admit wrongdoing. Customers who had open orders on January 28, 2021, or who tried to place buy orders that day were may be able to access to receive a portion of the settlement, though the payout per person was typically small — often under $100.

Other lawsuits continued in parallel. Some focused on whether Robinhood's order routing practices — selling customer trades to market makers like Citadel — created conflicts of interest. These cases moved more slowly through the courts and some remained unresolved years later.

Regulatory investigations and fines

The SEC and FINRA both opened investigations into Robinhood's conduct. The SEC's investigation focused on whether Robinhood had adequate risk management systems and whether it disclosed conflicts of interest to customers. FINRA's investigation examined the same issues plus Robinhood's order routing practices and whether the company had treated customers fairly.

In December 2023, FINRA fined Robinhood $70 million for supervisory failures and inadequate risk management. The regulator found that Robinhood's systems did not properly monitor the risks it was taking and that the company had not adequately disclosed to customers how it made money from their trades. FINRA also cited Robinhood for failing to have adequate procedures in place before restricting trading.

The SEC's investigation took longer but reached similar conclusions. In 2022, the SEC fined Robinhood $65 million for misleading customers about how it made money and for failing to disclose conflicts of interest. The SEC found that Robinhood had told customers it did not charge commissions, but had not clearly explained that it made money by selling their order data to market makers — a practice that could work against customers' interests.

How Robinhood's business changed after GameStop

The GameStop incident forced Robinhood to rethink its business model. The company had built its reputation on the idea that it was democratizing investing by eliminating commissions and making trading accessible to ordinary people. But the incident revealed that Robinhood's real customers were the market makers who bought its order data, not the retail traders using the app.

Robinhood went public in July 2021, about six months after the GameStop halt. The company's IPO was controversial — many retail investors who had used Robinhood during the GameStop saga boycotted the offering. The stock price fell on its first day of trading and remained volatile for months.

After the regulatory fines, Robinhood made changes to its order routing practices. The company began routing more customer orders to different market makers and exchanges, rather than concentrating them with Citadel Securities. It also increased transparency about how it made money and began disclosing more information about order execution quality to customers.

What happened to other brokerages that restricted trading

Robinhood was not the only brokerage that restricted trading on January 28, 2021. Interactive Brokers, TD Ameritrade, E-Trade, and others also limited buying on GameStop and related stocks. But Robinhood bore most of the public anger because it had marketed itself specifically to retail investors as a way to level the playing field against Wall Street.

Interactive Brokers' CEO, Thomas Peterffy, went on CNBC and explained that the company had restricted trading to manage clearinghouse collateral requirements. His explanation was technical and credible, and Interactive Brokers faced far less backlash than Robinhood. E-Trade and TD Ameritrade, which were owned by larger financial institutions (Morgan Stanley and Charles Schwab, respectively), also faced less scrutiny.

Robinhood's vulnerability came from its brand promise. The company had told customers it was fighting for them against institutional investors. When it restricted trading, it looked like a betrayal of that promise — especially because the restrictions seemed to protect the very institutions Robinhood claimed to be fighting against.

The broader impact on retail investing and regulation

The GameStop incident and Robinhood's response sparked a broader conversation about retail investor protection and market structure. Congress held hearings where lawmakers questioned whether retail brokerages should be allowed to restrict trading, whether order routing practices created unfair conflicts of interest, and whether clearinghouse collateral requirements were too high.

The incident also led to increased scrutiny of social media-coordinated trading and the role of online communities like Reddit's r/wallstreetbets in driving stock prices. Regulators began examining whether such coordination constituted market manipulation, though no charges were ever filed against retail investors.

Years after the GameStop halt, the debate over Robinhood's actions remained unresolved in some ways. Supporters of Robinhood argued the company had acted responsibly to prevent a financial crisis. Critics argued it had prioritized its own financial interests and those of its market maker partners over its customers' interests. The truth likely lay somewhere in between — Robinhood faced real risk management pressures, but it also had options it did not pursue, and it did not communicate clearly with customers about what was happening.

Frequently Asked Questions

Did Robinhood go out of business after GameStop?

No. Robinhood went public in July 2021 and continues to operate. The company faced significant reputational damage and regulatory fines, but it remained solvent and profitable. However, it lost market share to competitors like Fidelity and Charles Schwab, which many retail investors switched to after the GameStop incident.

Can Robinhood restrict trading again?

Robinhood retains the legal right to restrict trading in extreme circumstances, as do all brokerages. However, after the GameStop incident and subsequent regulatory fines, the company faces much stricter scrutiny if it does so. Regulators expect brokerages to have clear policies, adequate risk management systems, and transparent communication with customers before restricting trading.

Did anyone go to jail over the GameStop trading halt?

No criminal charges were filed against Robinhood executives or employees related to the trading halt. The SEC and FINRA pursued civil fines rather than criminal prosecution. Some retail investors and commentators called for criminal charges, but prosecutors did not find evidence of criminal conduct.

How much money did customers lose because of the trading halt?

There is no definitive answer. Some customers who wanted to buy GameStop at lower prices on January 28 missed out on potential gains as the stock continued to rise. Others who were forced to sell at lower prices lost money. The $70 million settlement Robinhood paid was meant to compensate for these losses, but the per-person payouts were typically small.

Is Robinhood still selling customer order data to market makers?

Yes, but with more transparency and oversight. Robinhood continues to route customer orders to market makers, which is how it makes money. However, after the regulatory fines, the company discloses this practice more clearly to customers and routes orders to multiple market makers rather than concentrating them with a single firm like Citadel Securities.