Position Closing Only (PCO)

Understanding Position Closing Only (PCO) Restrictions

Have you ever been blocked from buying a stock but still allowed to sell it? This is often due to a “Position Closing Only” restriction, also known as PCO. While this tool has legitimate uses, its application by firms like Robinhood during the January 2021 “meme stock” event has come under intense scrutiny for harming retail investors.

At Iorio Law PLLC, we believe educated investors are empowered investors. This page explains what PCO restrictions are, why they are supposed to be used, and how their improper use can be a sign of brokerage misconduct.

What is a Position Closing Only (PCO) Restriction?

A Position Closing Only (PCO) restriction is an action a brokerage firm takes to prevent its customers from opening new positions or increasing existing positions in a specific security. When a stock is marked as PCO, investors can only sell or “close” their existing positions; they cannot buy additional shares.

According to a report from the U.S. House Financial Services Committee, this is considered an “extraordinary” tactic for a brokerage to use as a method of risk mitigation.

Why Are PCO Restrictions Normally Implemented?

Broker-dealers very rarely introduce PCO restrictions. Under normal circumstances, these restrictions are reserved for specific regulatory and compliance situations. Legitimate reasons include:

A Stock Delisting: The stock is no longer traded on a major exchange.
Regulatory Bans: The company that issued the stock has been banned from U.S. equity markets.
Corporate Actions: If the company is going through a corporate action, such as a merger or stock split.

In these scenarios, the PCO restriction is a formal step to wind down trading in a security that is no longer compliant or available for public trading.

Robinhood’s Unprecedented Use of PCO Restrictions

The events of January 2021 were different. When Robinhood and other brokerages imposed PCO restrictions on GME, AMC, and other meme stocks, it was not for any of the standard regulatory reasons cited above.

Instead, as the House Financial Services Committee report concludes, Robinhood used PCO restrictions as an “extraordinary” risk mitigation tactic to deal with its own internal liquidity crisis and its failure to meet collateral deposit requirements from the National Securities Clearing Corporation (NSCC).

This unprecedented action had a severe impact on the market and individual investors:

Artificial Price Suppression: By disabling the “buy button,” the restrictions created immense, one-sided selling pressure. This artificially drove down the share prices of the affected stocks.
Market Manipulation: The playing field was tilted, preventing retail investors from participating freely in the market and trading in what became an unfair and manipulated environment.
Substantial Investor Losses: Investors were either forced to sell at suppressed prices or were unable to execute their trading strategies, leading to significant financial damages.

Holding Brokerages Accountable for Improper Restrictions

A brokerage firm’s duty is to provide fair and consistent access to the markets. When a firm like Robinhood implements extreme measures like PCO restrictions to save itself from its own poor risk management, it may violate its core duties of fair dealing and best execution under FINRA rules.

If your portfolio suffered losses because a brokerage firm suddenly restricted your ability to trade, you may have a claim to recover those damages through FINRA securities arbitration.

Learn more about our investigation into the Robinhood January 2021 trading restrictions.

Contact Us About Your Experience

At Iorio Law PLLC, we have a deep understanding of brokerage responsibilities and a landmark track record of holding them accountable. If you believe you were financially harmed by a brokerage’s use of Position Closing Only restrictions, contact us today.

We offer a 100% free and confidential consultation to review your case and discuss your legal options.

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Iorio Law PLLC | National Securities Litigation | Representing Investors Nationwide

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