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> Am I reading this correctly and he really wasn't in the hole badly, but a crappy presentation of information broke him?

Yes, but I think it's important to note that every other broker I've used presents the information in the same way and the way they are displaying the info is an accurate representation of the state of the account at that moment.

Blaming bad UI is the easy way out here. Robinhood should take the blame for this, but not because of bad UI. Robinhood should be at fault because the knowingly allow tons of "investors" to have options trading access with little or no screening and verification.

Blaming the UI here would be like blaming a single specific gun maker for a mass shooting, when the real question you should be asking is how did this person get a gun at all?

UI-wise, I'm not recommending we should go back, but that was one advantage of having a licensed broker on the phone when making trades, they could explain account statements to you.

How would you suggest to limit option trading?

Going through a mandatory guide

The broker I use has a mandatory quiz you have to pass, not only for options, but for ETFs, etc.

In the EU, before opening a trading account you are forced by law to compile a standard questionnaire to assess your financial knowledge and risk tolerance. Depending on the results, you might not be able to trade certain instruments.

My broker (Scottrade and now TD Ameritrade) called me, asking for a verbal agreement that I knew that options were high risk and yadda-yadda that can lose more value than they are worth after I signed some forms.

These instruments are very high risk and not really meant for average investors. Their primary goal is for hedging and leverage.

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One of the reasons for the "Black Friday" (kicking off the Great Depression) was the proliferation of leverage among people who didn't really understand it. That's why most other companies make you sign forms and ask for verbal agreements before allowing you to have access to things this dangerous.

>"Black Friday" (kicking off the Great Depression)

Black Thursday. Black Friday is the name of the crash in the federal gold market half a century earlier - or more commonly, the yearly American mega-sale event that follows Thanksgiving.

Options are already broken into levels 1-4 (this is an industry thing, not just RH). Levels 1 and 2 don't run the risk of this happening since you can only sell to close. On other platforms that I've used, going from levels 2 to 3 took a while and required some verification steps to try to confirm that I knew what I was doing.

Robinhood already asks for information about your net-worth, income, etc. The problem is that they verify nothing (at least in my experience). I read /r/wallstreetbets all the time, and plenty of 18 year olds say they are making 100k+ and RH just approves them. They need to improve that process.

Just checked and you don't even need to say you're making 100k+.

I marked that my liquid assets are under 25k, net worth is under 25k, and yearly income is under 25k (all the lowest you can select) and they approved me for option trading instantly.

Looking at GOOG the UI shows me put where the max loss is $8.5k. Seems reckless if they really use the information I gave them to determine what level of risk is appropriate.

I just want to point out that at level 1 you can sell to open covered calls.

Trading options already requires extra approval with several levels which determine how advanced, how big, and how risky of a trade you can make.

Better verification of a person's financials and trading knowledge before allowing this access would be helpful.

Yes, but I think it's important to note that every other broker I've used presents the information in the same way and the way they are displaying the info is an accurate representation of the state of the account at that moment.

There is a rather large difference between how you do interfaces for people with training who are experts and the amateurs that Robinhood is targeting. It is the difference between a full cockpit and the interface you put on something like Garmin's autolanding system[1].

So, yeah, I'm blaming the interface people at Robinhood because they are targeting a non-broker segment of the population and need to find a way to put that information a broker would give you into the interface. This information includes things like "you do not own this much money" at a minimum. Facts are amazing things, but eventual truth might of save this person.

If you target a group of people, its your responsibility as a UI designer to make sure your interface is actually safe for that group of people.

1) https://www.garmin.com/en-US/autonomi/

> There is a rather large difference between how you do interfaces for people with training who are experts and the amateurs that Robinhood is targeting.

But regulation requires that you do self-certify as (to a certain extent) an expert who understands the more sophisticated product in order to trade it.

I suppose I don't disagree that they're targeting people who in many cases probably shouldn't be passing that screen, but I suppose I think that's the problem, rather than it not being dumbed down enough.

Sure, but I would not necessarily blame the UI designer since the breakdown could have come from a number of places: requirement changes, implementation differences, miscommunication, etc. I mean who knows unless you're behind the scenes? Just blame the company.

I agree with what you're saying, but I'd like to note, I'm not a professional trader or anything. All the other platforms that I'm using mentioned (Tastyworks, Schwab) are available to retail investors and are targeting the same non-broker segment.

Could the UI be better? Probably. My point isn't to absolve them here, it's just to point out that this same issue exists across most of the platforms. That leads me to believe that, while the UI may have contributed, it's not the root cause of the issue.

You have to actually go through a short process to be "approved" to trade options, including checking off a box saying "I know how to trade options". Maybe there should be additional warning signs, but RH does make it pretty clear that there are many options trades where you can lose much much much more money than you put in. Just take a look at what happened with oil and USO recently for an example of how stupid this can get.

Like I said elsewhere, its horrible this kid killed himself over something as transient as this, and RH's interface is pretty dumb, but if you're selling uncovered put spreads, and covering them with call spreads and you're doing all of this in RH....well you're either much better at RH than I am, or much worse.

When I applied for options trading approval, I got a phone call from Schwab with a quiz on some hypothetical trading scenarios, like "if you did X what would your maximum exposure be"?

On both RH and TastyWorks all I had to do is check a box saying I knew how to do it. I'm curious about other people's experiences.

For what level of options trading, 3? 4?

Is there a solution that doesn't involve curtailing the freedoms of people just to prevent them from making bad decisions?

Curtailing the freedoms of people to prevent them from making bad decisions is de rigueur. That ship has sailed. the only question under debate is “how much?”

Guess I was missing the words "even more".

Cryptocurrency.

The "move fast and break things" ethos in the tech industry is a recipe for disaster in certain contexts. I am sure I have designed some poor or confusing interfaces in my day, but it has never been in a context in which poor communication can literally lead to someone killing themselves. That would make it tough to sleep at night.

This is the way options market works. Each leg of an options spread can be executed on different days (since one is in response to the other). A different UI total would actually be misrepresenting the current state.

I find it highly unlikely that the "other leg" of his option contract was worth zero.

Why would it be zero? Seems like he sold a credit spread. One leg can be exercised which means it gets converted into a large equity position, which will then be offset by the other leg being exercised by the broker when they get around to it.

Since it's a defined risk trade, you can easily sell a large number of contracts which can result in very large stock positions when exercised. It's not an issue, the math works out, but it's something you need to understand before making the trade.

Even if it was worth near zero (market price between strikes, very close to expiry), Robinhood holds collateral for the difference. ie, if I sell a $50P and buy a $45P, Robinhood holds $500 cash collateral to cover the difference. The maximum you can lose, once thing are settled, is the difference between the strikes less the premium collected.

With a put spread, if I sell $50P and buy $45P, the holder of the $50P I sold can exercise at any point, and I have to buy his 100 shares at $50/ea. Let's say I got a $2.50 premium ($250 total) on that spread. At that point, my account is -$4750, +1 $45P. Perhaps the premium on the $45P is $0.50, so my account's nominal value is -$4700, +100 shares at this point.

However, my $45P expires in 3 days, so maybe I want to hold on and see if the shares I had to buy at $50 will increase to $55, my $45P expires worthless, and I can then sell them for $5500 total, leaving my account +$800. Or, worst case in the other direction, the price drops below $45, and I exercise my $45P to sell them for $4500, leaving my account -$250. But until expiry or assignment, my account's nominal value is in the red.

The current state is what probably sent this person over the edge. The eventual state is the truth an amateur, which is what Robinhood is targeting, would understand. Only showing the current state truthfully is fine for experts, but not fine for amateurs because it obviously caused a horrid reaction.

That's the problem, an amateur who doesn't understand the trades they're making and how to read their positions should not be trading.

People already sign disclaimers stating they understand how to trade and potential risks. Perhaps a more intensive testing process can help to enforce that, but they're still adults making their own decisions and I don't want to add even more regulations for market access.

Robinhood's goal is seemingly to make more complex investment vehicles available to a wider variety of people. It is therefore inappropriate for them to present this information in the exact same context that is used to communicate this information to more educated investors.

It is like giving a loaded assault rifle to a trained member of the military compared to an average civilian. You can't just assume each will have the same level of knowledge. You need to provide that civilian more detailed instructions in order to make sure they don't cause accidental and unnecessary damage with it.

There's only one context, you can't misrepresent the market.

You also sign a lot of paperwork stating that you understand the mechanics and risks of trading. There are several levels between buying stock and selling options that you need to ask approval for.

You also have to agree to a EULA to create an account on the App Store to download Robinhood. How many people read that EULA? How many people read whatever paperwork Robinhood asks you to read?

The truth is that Robinhood targets a less educated segment of the market. They have a moral responsibility to either educate those users or put protections in place so it is harder for those users to harm themselves due to the lack of an education that can be assumed standard in other investment contexts.

This is not an EULA. It's a serious contract with real signatures and legal repercussions. You cannot claim that you didn't read it and just deny any consequences.

I already stated elsewhere that there should be more verification and testing of credentials and knowledge but at some point, the adult making the decision still has the final responsibility.

I didn't say it was a EULA, I was comparing it to the EULAs that users are accustomed to agreeing with. I don't know Robinhood's specific process, but do they make it clear that what the user is agreeing to is something distinctly different than a EULA? Do they accurately communicate what is being agreed to or do they just assume the user read and understood the paperwork?

>I already stated elsewhere that there should be more verification and testing of credentials and knowledge but at some point, the adult making the decision still has the final responsibility.

And in the absence of this verification and confirmation of credentials, Robinhood should be expected to communicate these details in a way that even someone without those credentials can easily understand.

Reading and understanding the paperwork is your responsibility, and you attest to it in those same documents.

Saying you didn’t know what you were signing isn’t an excuse and doesn’t relieve you of your contract. While more verification is necessary, lying about your credentials is still your fault, if not outright criminal.

But how do you know where that line is? In the right circumstances, almost anything could set someone off. It's hard to anticipate a 20 year old being so upset at the idea of bankruptcy, or being aware of the details of stock trading while being unaware of bankruptcy. And while the same error could happen to someone significantly older, the odds are very strong they would be more skeptical and less impulsive.

UI malfunction happened to my mobile E*Trade app roughly from January until end of May. The first time it happened, my heart rate jumped! I only have simple stocks, and I knew the day was not as bad, but the app showed big red numbers. Luckily, switching report in the app shown different numbers... so I knew the app was not displaying the right numbers. Which was upsetting as I had no easy way to know my real situation. Later I found out that the app was reporting fine when the stock market was open, but then lost its mind after the market close, showing random numbers (mostly in red or minimizing the gain). Now, it seems to be fixed. But lesson learned. Actually, it happened to my dad, back in the 80's when the only way was to go at the bank and ask for the numbers. The teller missed a line and gave my dad a very bad number. He had invested portion of the money coming from the sale of our house, while the new house was under construction. The investment was supposed to be very conservative (and it was), another trip to the bank the next day clarified the situation. I am wondering if those data issue would happen more, and if the consequences would be higher now than before ? It is scary to me that a 20yo can play with money so easily. I am no fan of retail bank, but I would expect some "Are sure? You might lose all and more" before signing the paper. Maybe Robinhood should explicitly compute the maximum you can lose and ask you to confirm that you do understand it. Actually, they might end up with more people trying exotic investments as like me I refuse to touch it unless I fully understand the risks.

Yes, he could only lose as much as he bought for the contract price. I don't see how someone's cash balance should ever be affected by the strike price of an unexecuted contract.

Can someone correct me?

It's just a weird thing that some online brokers seem to do. I once had exercised contracts for 200 shares put me "in debt" for $4mm. Then the shares settled, and everything in my account went back to normal.

correct, unless he bought on margin, which should have triggered a margin call when he was unable to cover his position, but still unclear.

He had a spread. The short leg was assigned, the long leg cancels it out but it doesn't happen instantaneously. So he temporarily was on the hook for -300 $AMZN shares or whatever, which made his buying power massively negative. Then the long leg gets executed and it all evens out in the end for a relatively small profit or loss (the delta of the strikes), but that can be a nerve-wracking weekend if you don't understand the process.

Robinhood's UI is not particularly informative in this process either.

The article says the account was not authorized for margin trading so how in the world could this even happen?

You don't need margin, you only need enough cash to cover the maximum loss, which is can be very small. e.g. right now if I wanted 3 put spreads on AMZN at 2640/2635 expiring this Friday, it would give me a net credit of about $2 per contract, or $600 credited to my account. My maximum loss would be 3 * 100 * (2640-2635) = $1500 minus the credit ($600) received, or $900. As long as I had a mere $900 in my account, this trade would be allowed.

If I held through expiration and the short leg (AMZN $2640) was assigned, I would be contractually obligated to buy 300 shares of Amazon at $2640 a piece. This would briefly reduce my buying power by -$792,000. But as I also hold a contract to sell 300 shares of Amazon at $2635 ($790,500), it would have a net cost of only $1,500. And since I already received $600 up front, it would be just $900 additional out of pocket. But for a period of time, my account balance would have displayed -$792k.

It happen when you use spreads. I have personally had this happen and it's jolting at first but is usually back to normal within hours. Here's how it works:

1. You sell a call credit spread. This is where you sell a call at say $100 and collect premium (let's use $2 for this example), then buy a call at $105 to cap your possible losses.

2. The options expire and the price of the stock is $110. I have lost the maximum amount. I sold a call and collected premium of $2, and bought a call at $105, so my total maximum loss was the difference ($3).

3. Robinhood will settle these assignment after hours, and will for whatever reason show the balance as if you hadn't bought the $105 call protection. So my balance may show a massive loss until the reconcile both the short and the long end of the calls.

I have seen my balance go to -200k before when it was way in the positive before the day ended. This happened to be a Friday and it wasn't resolved until the markets opened the following Monday.

Luckily, I realized what was going on, but many novice investors may not.

Could it happen that, due to some unusual circumstances, the call at $105 doesn't work, increasing your loss above the supposed maximum amount? For instance, what if the one who sold the call at $105 does not deliver the stock for some reason?

I think the risk of that instance is low, since options are a legally enforceable contract. I think the brokerage has some liability to pay the contract then get the money from their client, but I don’t have my Series 7 so take me with a grain of salt.

There is so-called "pin risk," that could cause a larger loss than the "maximum". In this example, say the underlying closes at $102. The call you sold is ITM and is exercised, leaving you on the hook for 100 shares. However, the call you bought was OTM, so your broker won't exercise it for you, and you'd need to buy the shares at market to cover. However, you can't do that until the market opens on Monday. So if something happens that causes the stock to open substantially higher on Monday, you will be out whatever that difference is.

Many traders will close their positions before market close, leaving a relatively tiny amount on the table to avoid the risk.

That's a really good point. I'm pretty sure Robinhood exercises behind the scenes for you on the day of expiration 30-60 mins prior to close to avoid this.

The article says the account was not authorized for margin trading so how in the world could this even happen?

What I just described doesn't require margin. Spreads are "defined risk" trades so as long as you have enough in your account to cover your max potential loss, you are fine to make the trades.

yup. robinhood SUCKS at handling short term options spreads. if a leg gets exercised and you all of a sudden own or have to sell a ton of stock, they don't tell you the other leg will get exercised to cover. they just let you stew with the weird after effects in your account. the founders and insiders are all going to be extraordinarily wealthy while things like this happen and some lives are outright ruined or kinda ruined.

All brokers do this because the each option leg is a separate trade and one executes in response to the other, and can happen on different days. It's the same as owning stock and having ITM options that will close that equity position, but the totals will be skewed until then. Broker UIs can be made clearer but these are basic fundamentals.

If anything, it highlights the fact that these people should not be trading in the first place if they don't understand their own positions, and brokers need a much stricter gate before allowing them access.

most brokerages will exercise the other leg for you immediately and be around to respond if this happens to you. robinhood does none of that. there’s no customer service for DAYS.

If it’s exercised early then you won’t know until the next day. There will always be some discrepancy. It’s up to you to understand what trade you made and how your positions will exit.

That being said, yes customer support could help him understand what’s happening.

"...they have slick interfaces"

Their interface is an abomination. Even the tiny amount of information they do present is hard to parse. I use it for fun time investing, but would never trust real money with a company that can't plainly and clearly show me the status of said money.

I'd blame the marketers. He should not have felt comfortable making trades at the scale of hundreds of thousands of dollars even if they netted out to a small amount.

The law requires brokerages to assess clients knowledge and fitness to trade more advanced instruments like spreads and naked options. This individual most likely lied to the brokerage about his trading experience, and that's why he was approved for Level 3+. There are many warnings issued when you start in futures and options, to make users aware of the risks of trading without sufficient experience and education. The cost of equal access to financial instruments (imo, a good thing) is that the balance between KYC, education, and risky behavior is hard to strike. This is an example of those costs coming due. I don't really think the marketers are to blame.