Robinhood 20yo trader with no income loses 700k on options, takes life
twitter.com
twitter.com
The consensus I've gathered is that this was a result of a stock option credit spread's short leg being assigned combined with a misunderstanding of the trading platform's reporting. If this is true, an analogy for the situation would be:
The individual bet on a coin flip, wagering $10 (representing the $700k) on heads and $9 (figurative amount representing the spread) on tails.
The outcome was tails.
The account immediately reflected the loss but not the win, displaying a -$10 balance.
When the $9 payout from the win would have settled, the account balance would have become -$1 instead of -$10.
The individual didn't realize the $9 payout was coming, and took his life in reaction to the -$10 balance.
Fortunately, if you do a very bad investment, you can sell all your assets, go bankrupt, and keep your life. Too bad the poor guy chose to take his life. But this again looks like not doing enough homework.
This is very sad. I wish these things were written in large red letters on the signup page for a trading account, and one would have to type them in first person, like "I realize that I can lose all my possessions as a result of a bad trade" (no copy-paste allowed) to even accept the terms of service.
[Edited: spelling]
Maybe other risky places should have more warning signs, so that an optimistic 20-yo would have to stop and think before acting.
I think this is the basis for the accusation of tone-deafness.
Power tools have safety feature; the leverage tool should, too. AFAIK Robinhood won't allow you to make a naked call, you have to show that you have enough to pay. Either their safety feature failed (very bad, needs fixing and constant checking), or the poor trader used something else as a collateral, and that could be an important part of the tragic outcome.
if robinhood is willing to take on the risk of a counterparty bankruptcy, i don't see why not. Robinhood is on the hook for lending the margin, not the boy.
It’s tragic that the 20yo died, many sites warn that trading is risky. What they shouldn’t allow is to trade with more money than you can prove to possess.
Anyone who sells access to such a tool should make sure of that happening. That's my point.
And your comment here is at odds with the tone you used above.
If there is energy to direct, it has more to do with people that don't have a self preservation instinct and deciding whether we actually want to add one back to them. Very different than misattributing disdain towards the action they ascribed to their suicide.
It is pretty tone deaf to get this mixed up.
What you propose is nice, but against platform financial interests.
But I suppose this such cases are some of the few cases where regulations (not even necessarily state-imposed) really work in the public interest.
It seems naive to read a tweet with a little information about someone completing suicide, and then assume that if they had known (more) about bankruptcy they would not have done it.
There are other things that we can't read out of the tweet that are really important in these situations, like access to social support.
- the oven doesn't look dangerous, but it's hot
- this water looks like the other one, but it's boiling and will hurt
- a car can drive across the street and run over you
- the electric outlet looks passive but it'll electrocute you
Aside for very primal fears, people aren't born with a plethora of "things to know are dangerous in the modern world". So I'm not surprised that a 20yo would end up not knowing that there's a risk and that it's "obvious".
The underlying problem with the 20yr old is likely mental instability and depression - far too common amongst the young. The gamble on options for a way out, and having seen this fail, decides that their life isn't worth living any more.
It's a deeper problem than insurmountable debt and not knowing the risks.
1. Folies of investments, how you can lose everything.
2. Folies of marriages, divorce laws and how you can lose everything.
3. Folies of gambling in casinos and how you can lose everything.
4. Folies of alcohol, tobacco and other soft drugs and how you can lose everything.
Each of these class should be given by 2-3 people who actually lose everything in these cases.
But in the case of things like taxes and child support, you can ultimately lose a lot more than everything.
And don't forget to mention all the women who accept diminished lifetime earnings because they were the primary caregivers for the couple's children, and then find themselves struggling to support those kids and themselves if their husbands leave, no matter what child support was awarded on paper. Even if the father does come through on the court-ordered payments, she's never going to get that decade of her career back, or the retirement savings she missed out on.
I don’t know much about Robin Hood but people here seem to be indicating that it’s not possible to end up owing money like that.
The tweets also seem to advertise for two other twitter accounts that give investing advice.
Tide never advertised their laundry detergent as edible, but they still had to deal with it and come out and actually advertise that you shouldn't eat tide pods. Similarly, I think, with Robinhood I think they actually have a responsibility to actually inform their customers the real risks associated with what they're doing.
It just doesn’t work like that.
This kid didn't lose $700k, his account just shows -$700k until Monday morning when it will update with the other leg being exercised and he probably lost a few grand instead. Here's a similar situation where someone thought they lost $172k, when in reality they lost $2k. [1]. It's a combination of a shitty UI and people not understanding option spreads.
[1] https://old.reddit.com/r/wallstreetbets/comments/aohvow/hi_t...
This story just got a lot more tragic... He maybe lost $10k. Maybe nothing at all.
Hell, he might have made money, but the RH UI just showed him this abysmal number.
Or there's more to this story. I would be interested in knowing how long the issue had been going on, and if RH support had been contacted.
I guess if you short calls you have unlimited downside, no?
but it was my understanding that the entire point of options was to cap downside (don't exercise) and maintain upside
It also appears RH users get margin accounts by default, at least from everything I've read. If that's true, it's probably the real problem.
In the EU retail traders are permitted access to margin, but brokers are required to eat any loss exceeding the value of the account. It's not enough, because it still means new "traders" are exposed to amplified volatility, thus ensuring their accounts will blow out much faster than they may have otherwise, and positions that might have recovered in a cash account get margin called and closed out at the worst possible moment.
Leverage/margin access should require similar levels of study as a private pilot's license
No, you have to explicitly opt-in to it.
If and when you open a Robinhood account you have to opt-in to gold to be able to invest with margin.
https://www.reddit.com/r/RobinHood/comments/9guf3n/doh_some_...
Live by the sword, die by the sword.
The tweet seems to imply that too, but a lot of the comments here look misinformed.
However, when you apply for options trading, you have the option to add margin to your account. It’s essentially just a tick box. It appears from the twitter thread that this user unknowingly added margin to his account, traded on margin, then had a really big margin call.
Presumably this doesn't actually happen since it's doable, so I'd be curious what -700k losses practically means.
Person A would have an asset worth X/2, in the form of his contract with person B. When A declares bankruptcy, his X/2 would be used to partially pay his debtors. This only way this scheme works is if A conceals this during the bancrupty. For comically large X, you can expect to have a team of lawyers and forensic accountants look through your books. If they catch on, you get nothing except a potential fraud conviction.
But professional investors also have their own bookkeeping and deeper pockets to pay for losses.
Broadly, unless you have a million dollars to lose, you have no business putting your money in anything but mutual funds. Even there, only low-overhead index funds are a good call.
For most people, buying individual symbols is very foolish. And options, etc., is simply insane.
Any relatively new investor trading options is also a huge mistake, it is surprising he was approved for an account where he can even use options.
At the least I know I don’t know everything in stocks. I know enough to ask questions when I don’t understand. My account is still set to zero margin and will stay there for the time being.
I could have written a suicide note, but then I didn't. It actually never crossed my mind. It was so inconsequential that I was prepared to just move my static website off of that S3 bucket into another AWS account bucket, and remove my credit card which prompts Amazon to just terminate the account. If it went to actual collections I would have been ready to discharge it and deal with the consequences of not being able to get airlines miles on a premium credit card for a few years.
In 2020, this is considered tone deaf.
And you are missing that brokers routinely settle for much lower amounts in bad trades.
Robinhood, is like any tool, and can be used in a positive or negative way.
I've been telling my friends using Robinhood to check out https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/03933...
Commission free ETFs and blue chip stocks are great ways to start building wealth (especially for novice traders who are not interested in specific tax advantages). Everyone should really read the book before trading
Market makers won’t demonize day trading—the “new blood” are their best marks.
Though doing the contrarian move is sort of common wisdom: "sell when everyone is buying, buy when everyone is selling", of course if you understand what to sell/buy in either case.
Look over the whole market for whst is going down, and buy that, that's what everyone is selling. Every finance information outlet ever tells you the day/month/year's biggest winners and losers, and most people aren't watching that and taking the contrarian position, or the winners and losers would be pretty boring.
As in, run a day trading service and analyze anonymized trading data?
Whoa. That is so elegant in it's simplicity. Evil, certainly, but elegant.
And now I'm imagining more elaborate versions that incorporate the Baltimore Stockbroker scam to convince the clients to invest (and lose) even more money...
No one makes money on symmetrical markets, and they therefore are unpopular.
Amazingly, a significant number of Robinhood customers are aware that they do this and don't care.
even as a day trader i wonder if it matters. i would be more annoyed that RH doesn't allow options on indices or futures, which leads to RH traders loading up on similar-but-not-identical products (eg USO as a substitute for oil futures or whatever VIX etf's remain standing)
All the other major retail brokerages do this, unless they allow you to provide specific routing instructions (which usually comes at a cost, but I haven't checked lately). Everybody's doing it doesn't make it right, but it makes it unavoidable.
It's actually usually good for you --- your brokerage has a duty of 'best execution', so they can only route your trades to the HFT when the quotes are the same or better and they expect the HFT trade to complete as well as if they routed it to the other market. Often that means you'll get a better price, or more likelyhood of a complete trade, but some tradea might have executed better at another venue.
There's much bigger things to care about, like your brokerage's track record of availability or lack thereof during the trading day, how confusing their UI is for the things you want to do, if their means of access work with you (some people want local offices, which excludes some brokerages), fees and charges for services, including hidden fees like below market interest on deposits or above market interests on margin loans (but please don't have margin loans, cause it's usually a bad idea), etc.
The brokerage gets paid for order flow.
The retail investor will often get a price better than the quoted market price, and the brokerage has a duty of best execution per SEC regulations, so the prices can't be worse very often; the duty is examined in aggregate, so some trades may execute poorly. Order flow payments are a part of how brokerage expenses are funded, one of the factors in the reducing and eventually eliminating of comission charges.
The HFT benefits, as you said, because they're trading against retail investors, and can use techniques appropriate for trading against random trading, rather than trading against sophisticated traders (or other HFT).
The downsides, I guess, are for the traders whose orders are on the other exchanges --- they didn't get your trade, so they will wait longer, and may not get as good a price as if you traded with them. Also, these dark pools may have less timely public reporting on trades, leading to an information gap? But, my understanding is there's already a lot of retail trading with less timely reporting as odd lots (not a multiple of 100 shares) may not have real time reporting.
The big money is trading options, etfs, equities,cme futures against each other and against swaps. But for swaps you need an otc desk.
Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.
> Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in.
The converse is also true. It’s entirely possible to almost guarantee yourself a tiny profit and almost no downside risk as it is to create infinite risk.
So EMH definitely maps to the options market.
In a zero-sum game, it's entirely possible and common to have a small number of comparatively large winners and a large number of losers.
aka the legend of 1r0nyMan
See also: https://www.marketwatch.com/story/trader-says-he-has-no-mone...
In a very roundabout way, EMH says, people with access to information will perform arbitrage trades based on that information as soon as it is available. If you are not those people, you will just have to ride the rising market.
There are posts below that will decry listen to Buffet and others however their accounts are so large listening to them is a disservice to yourself. Also the larger players have larger trades so their strategies are much different from a regular trader and there are lots of places for small accounts (under $5m) to make money.
I have a hunch, just a feeling, that the powers that be prefer that we normal people not know about how they make money by simply trading around stocks with excess money they have laying around.
He'd be a lucky fool in my book.
This sort of trading is gambling, pure and simple. Winning doesn't retroactively make it a good decision to play.
That is not the case for stock purchases - the stock appreciates in value because the business it represents appreciated in value.
Just because something has risk, doesn't automatically make it gambling.
Not necessarily: farmers use options as a kind of "price insurance" to insulate themselves from changes in the price of their crop between now and when they are ready to sell it.
Yes, for one party in an options trade to gain X dollars the other party must lose X dollars, but both parties can gain in what the economists and decision theorists call expected utility.
We have all heard the saying that after a person's income reaches $80,000 or so per year, further increases in income don't improve happiness as much as the previous increases. In other words, a person's utility function is not a linear function of income, but rather the curve flattens out a little after about $80,000 a year.
Similarly, just because an options trade is zero-sum in dollars doesn't mean it is zero-sum in the utility conferred on the two parties to the trade.
But that doesn't explain why a 20 year old with no income should have access to these instruments. There's a reason most banks wouldn't allow that, in the end the platform probably has to cough up the money.
You don't get access to options by default, and even then there are levels of approvals before you can do advanced trades. If they require margin, your broker will keep watch and instantly liquidate if you go negative. That's the whole point of a "margin call".
It's very rare that a broker will lose money because of a retail trader.
There is absolutely no guarantee that this is the case. It's still a gamble. It's just that by the time something IPO's it's much less likely to fail, but it's still possible. Private shares the same. Hence, my original point, it's just a matter of degree of risk.
Because speculative trading is a zero sum game, it creates no wealth. And no, this isn't wheat farmers hedging bad weather.
But of course, the same instrument can be abused by gamblers. But it's not the instrument itself that's the problem - it's that there are people gambling with money they can't lose.
I agree gamblers are also a problem, although I'm not sure it's really a distinct group from speculators. But if you look at the amount of resources spent to in effect lower insurance premiums, I think you'll find it's much larger. So yes, the lowered insurance premiums are good, but the costs are so high that on net it's negative for society.
Speculative trading is a key component of markets. People speculate that X is undervalued, so they invest in X, this gives X more resources, so resources are allocated based on what people think has most potential for growth. People who continuously make bad predictions get filtered out of the market, so "what people think has most potential for growth" comes to approximate "what has most potential for growth", and we get efficient resource allocation.
This is a socially useless activity. Stop trying to force it.
Even farmers hedging bad weather isn't what it used to be:
http://nategabriel.com/egblog/wp-content/uploads/2019/01/6-2...
The elephant in the room is, the people who Robinhood is supposedly letting buy into a vast money fountain that is the stock market already had a way to get in.
The fees that other brokorages were charging shouldn't have mattered if these people were investing in the only responsible way for someone who doesn't know what they're doing... and that's buying into an index fund and leaving it for several years.
By it's very nature, the people who end up in Robinhood, who wouldn't be able to get "into" other brokrages, are the kinds of people who get eaten up whole by the rest of the market.
It's the rich stealing even more from the poor, while giving them the illusion they're all sitting at the same table eating the same meal. -
If Robinhood was really about doing what it claims to do, the app would have 3 tickers, QQQ, SPY, and DIA.
And when you put money in, it'd warn you that you should be ready to leave that money there for at least 5 years.
It sure as hell wouldn't have options trading.
Is that what robinhood is supposed to be? A conservative retirement savings portfolio? Sure, the app store tagline says "Invest. Save. Earn.", but the listing also mentions highly speculative instruments like cryptocurrency and derivatives. It also promises access to "real-time market data" and "relevant news articles" which is only needed when you're taking on an active management style. Clearly the app isn't designed as something you chuck money into now, and withdraw a few decades later.
>By it's very nature, the people who end up in Robinhood, who wouldn't be able to get "into" other brokrages
The reason why they wouldn't "get into" the other brokerages is because they transact in such small amounts that they'll lose most of their capital on trading fees. I don't see anything wrong with letting people make small trades that they wouldn't have otherwise been able to make.
>And when you put money in, it'd warn you that you should be ready to leave that money there for at least 5 years.
How about we let the users take personal responsibility? I like Matt Levine's idea of "Certificate of Dumb Investment". Disclose the risks to them, and let them do whatever they want. https://www.bloomberg.com/opinion/articles/2018-09-24/earnin...
Their idea is that they give everyone access to the financial markets, and that allows them access to wealth. My point is their name is playing on... Robin Hood who "took from the rich and gave to the needy".
But in reality it's just become another way for the rich to milk people who don't have that much money to lose anyways.
It completes the stated part of the mission, but completely forsakes the implied part of it.
> The reason why they wouldn't "get into" the other brokerages is because they transact in such small amounts that they'll lose most of their capital on trading fees. I don't see anything wrong with letting people make small trades that they wouldn't have otherwise been able to make.
My point is, they won't lose most of their capital unless they're day trading, or at least trading very aggressively. And that's wholly at odds with actually making money if you don't know what you're doing. If their goal was to create a gambling app, we already have Draft Kings...
I mean, take their options trading for example. First off, the mobile app has a guided view for people who don't really get options to trade options. Ignoring the... strangeness there. It will actively recommend options that are just pure fucking insanity. So far out of the money, with such insane expiry dates, that your odds are literally worse than the lottery. And to top it off, half of them don't even have volume! So even if you do somehow start to approach any semblance of profit, you can't sell!
They're so far OTM and with such low volume that they don't even make sense as "YOLO"s, they are literally recommending losing money for no reason. And it'll characterize them as "short term, high risk" when there are OTM options that are short term high risk, for marginally more money, with infinitely higher chances of profit! Why would you take someone who literally needs to be explained that puts are bearish, and show them this as the first option?!
These people are told options are risky, see these incredibly stupid positions, get no mention of the Greeks, no mention of volume (it won't even show any of this unless you drill down into another view!), and take Robinhood's suggestion "I came here for risky, it says this is risky, must be what I'm looking for".
> How about we let the users take personal responsibility?
How on earth is that at odds with warning users they should be ready to leave their money in the stock market for long periods of time, are you daft?
I don't buy it. I believe the reason we still have accredited investors is because Uncle Sam wants to make sure you at least have 1 million dollars of assets to have liquidated if you go bust.
I have never seen a truly lucrative market that consistently beats just sticking your money in an index fund that's locked away behind being Rule 501 qualified unless you literally just have millions of dollars sitting around and don't mind throwing away half a million on some high risk venture knowing it can blow up at any time.
Also Robinhood is disgusting, I explain more in my other comment, but people are now coming out and saying this kid didn't even owe the money that he was shown, there's a known issue with Robinhood's handling of multi-leg options that might have bit him:
https://www.reddit.com/r/wallstreetbets/comments/h97l9z/how_...
This kind of bullshit is why Robinhood is such a ridiculous proposition. It's giving someone access to a flaming ring of death, then giving them a rusted out bicycle to ride through it, and acting like you did them some great favor by letting them access the flaming ring of death because some other people in full gear on motorcycles do it all the time.
Robinhood as a broker has serious flaws (I wonder if they patched the bug that let literally anyone get infinite amounts of leverage through their app?), constantly breaking during periods of high volatility, misrepresenting risk, having terrible fills for options and stocks, not showing extremely important information on options up front just to make it "easier" for people. You add all this up with who it's targeting and it's sickening.
This won't be the last time this happens.
He was a kid with no income. Was they did they allow him access to so much leverage?
https://www.bloomberg.com/news/articles/2019-11-05/robinhood...
Robinhood will show one leg of a multi-leg options strategy as your balance in certain cases.
So you have theoretically sold 700k in calls, but it's covered by a near equal amount of options being bought, there is no scenario in which you could actually owe 700k
Yet Robinhood's engineers didn't properly implement the feature, so their account balance showed the calls as if they had been sold naked, resulting in -700k as a balance.
Wait, what, why would I celebrate someone who basically went to a casino and hit a jackpot, and what the hell does that have to do with empowering anyone other than casino owners.
https://www.google.com/amp/s/www.politico.com/amp/story/2019...
The idea that DeVos, whose family owns a school lending company, is in the administration is not just a conflict of interest, but an indictment of our entire political system.
this student loan construction is certainly the current state of the USA
Ironically, I get the sense that the implosion is probably going to come less from it being a previously bloated, overpriced commodity than for now being a perceivably fraudulent one -- IE, students are (justifiably) heated about having to pay the equivalent price of a home to take a glorified webinar from "Zoom University" -- and who can blame them, really?
Now, back on topic -- what happened here was tragic. At some point, Robinhood is going to get actually sued by someone who expects peer level performance (IE TD/tastyworks/etc). It'll be interesting to see what happens there. And, it'll be interesting to see if they are sued (successfully) here. But, nothing is going to bring this young person's life back. How utterly harrowing. We hear so often about deaths of despair as a coded reference to opiate deaths. I know that suicide is a really major risk for startup founders when things go sideways (as well as gamblers), so seeing a new version of that makes me (despite the desensitization of the present moment) experience a new, unique kind of sadness. I hope this poor young man's soul rests in peace.
But there's a practical problem applying this to student loans -- nobody who needs student loans will come out of college with meaningful assets. No house, maybe no car, no income. If you could discharge student loans in bankruptcy... there's absolutely no reason to not do it immediately upon graduation. Everyone would do declare BK and clear their debts, for good reason.
So nobody would ever give a student loan. Also for good reason.
So BK doesn't apply to student loans. Obviously there are other fixes here (government paid tuition, income based repayment, online classes, whatever), but the naive fix ("allow students to discharge loans") would not get us to a better-functioning outcome.
(unless your position is that burning the system down is a better outcome than status quo, which is a position, but it's then dishonest to argue that discharging loans is a "quick fix")
That's my understanding of why student loans have to stick with you.
There is one important difference between student loan and other loans. If your mortgage gets foreclosed, you lose your house. Your car loan, you lose the vehicle. Margin, you lose your stocks and investments and the collateral. In all these cases, when you cannot pay back the loan, the lender takes away your right to continue enjoying any benefits from the loan. You cannot not repay your mortgage but keep the house free and clear. Thus there is a strong incentive not to default on these loans.
This is fundamentally different from student loans. If you do not repay your student loans, the bank cannot wipe the knowledge you gained from your brain and sever the contacts you made in university. You will continue enjoying all the benefits of the education. Thus there would be a strong incentive to declare bankruptcy as soon as you graduate (because you have little to no assets to lose) if this were an option.
"The unfortunate thing is there are certain situations where RH will show this kind of amount due, but it is an anomaly for 24 to 48 hours as things process when selling calls and puts. Uneducated traders think they actually owe these amounts which is not close to accurate[.]"
That explanation would make more sense; I don't see how Robinhood could allow inexperienced traders such amounts of unsecured margin and survive as a business.
Things that should make sense often don't.
(Just FYI, if you go on r/wallstreetbets, you will see this countless times...the software not showing the correct position, the software not showing the correct position and then forcing users to trade such that they lose money, it goes on and on and on...this business isn't complicated, you had men and women with high school level educations running these positions for decades without these problems...one touch from the "geniuses", kaboom...again, very little about what Robinhood do makes sense, it is baffling that they are even regulated to handle money.)
The issue is that some people don't understand how option trades work, in this case a credit spread with 2 legs of a trade. One side was exercised and would have been offset by the other side when the broker got around to it, but it's not incorrect data.
It's up to the trader to understand their trades.
Specifically, in a spread he might have lost 770k on his short but up 760k on his long, so his actual loss at the end was just 10k.
Try one of the auto houses or any of the sketchy mortgage brokers. They will lend to you.