Robinhood sued by family of stock trader who killed himself
theguardian.com
theguardian.com
The way Robinhood displays this info is no different than most other brokers. I work at a fund and spent alotof time "smoothing" out our pnl to take care of issues like this where one side of a option basket gets exercised and the other side hasn't yet.
By that regard Robinhood is in good standing as they follow the industry practice.
The otherside of the coin is that option trading, especially for retail, often requires
1) the person requesting the ability to trade options explicitly.
2) a phone call that screens the user for a basic understanding.
3) the user has enough money in their account to be able to exercise any options that they buy, ie you buy 1 Call contract for Tesla that gives you the right to buy 100 shares at the strike, do you have enough money in your account to buy 100 shares of tesla? If not then you can't buy
4) don't allow users to sell options unless they have a large capital margin in their account, and often don't allow them to write contracts at all.
And robinhood has to have phone support for issues like this. This may be the thing that sinks them. Sometimes when dealing with money and contracts with time limits you need to talk to someone immediately on the phone. Robinhood is at fault here.
this poor adult chose suicide, a permanent solution to a temporary problem. if he had just waited a few days or talked to his parents.
https://www.cbsnews.com/news/alex-kearns-robinhood-trader-su...
>Later that night, at 3:26 a.m., the company sent an automated email demanding Alex take "immediate action," requesting a payment of more than $170,000 in just a few days.
Alex was then unable to contact customer support via phone and email. The day after his suicide, he was sent this email:
>"Great news!" The email read, "We're reaching out to confirm that you've met your margin call and we've lifted your trade restrictions. If you have any questions about your margin call, please feel free to reach out. We're happy to help!"
From what I read, he reached out to support (late at night) and they responded the next day (letting him know all was well?). Admittedly, this is after he killed himself, but it does seem to be a perfectly reasonable response time. It doesn't sound like they're in the wrong in that regard.
I don't quite understand this one. first of all, if I buy a call I don't have to exercise it. if I don't have enough cash to exercise it, can't I just sell the contract itself for roughly the same gain? if so, why should there be a capital requirement to buy one?
I'm assuming the loss was on options he wrote, not bought. Options buyers have a choice. Options writers don't.
There was an offsetting option or long or short position. But the options he wrote were exercised before those hedges settled. Robinhood's UI correctly showed the P&L at that time (though it could have gone further). The user didn't understand it. Robinhood then incorrectly sent a demand letter for $170,000 and didn't provide any means by which the user could contact them.
(Disclaimer: I am not a lawyer and none of this is even legal analysis let alone advice.)
If you have no skin in the game, and can buy literally infinite numbers of options, with no intention to execute, that breaks a lot of things (not least, because of how you force counterparties to behave).
Afaik, abusing this is a big part of the Reddit pump-and-dump train playbook.
You pay a premium for the option. One of the massive benefits of trading options is being able to leverage your money.
If you can't afford to buy 100 shares, you can buy an option for 100 shares for much cheaper, with the intention to flip the option later to either a bagholder or someone who wants to exercise it.
This method isn't even exclusive to retail traders.
Robinhood removes the friction associated with getting authorized for things like options trading. It's like taking a 16 year old to the craps table at a casino. IMO, it's irresponsible, both as a service provider and a stakeholder in the broader market to make that type of activity available to people with no money.
in the unfortunate case of this guy who took his life, robinhood apparently gave him access to a large amount of margin and the ability to write options. that seems crazy to me. I doubt schwab would let me do that, and I've been trading with them for years.
If its out of the money no big deal, you lose your money, what happens if its in the money?
Do they force you to exercise? If so then you owe them money that isn't in your account
Do they sell it for you? If so at what time? what if there is no offsetting bid for your option? What if they sell it and you had planned on exercising?
This just opens the brokerage up to all sorts of law suits eeven if their terms of service clearly aly out what they'll do.
There just is not always a cut and dry best option for what to do with options before they expire.
What happens if they sell an ITM option but it expires out of the money?
Forcing the user to have money to exercise their options makes it clear and easy, no guessing on when to sell the option, no worrying there wont' be a market for the option, etc.
For different products I get-together different questions if I want to enable them. This is with degiro.
Selling options is where it gets _very_ dicey afaik. It seems like the person in question was selling covered options which is the safer way afaik.
But yeah, you shouldn't be super scared of buying options. Selling options, in my opinion, requires more understanding.
Especially the heavily leverage products can go from +100% to -100% in hours. And then your money is just gone. And you have nothing.
Independent dependent?
> The family of a 20-year-old stock trader who killed himself have sued the broker Robinhood for his death, citing its “misleading communications” that caused their son to panic over what he wrongly believed were huge market losses.
> Robinhood notified Alex Kearns in June of what he thought was a $730,000 loss on a trade, and when he was unable to communicate with anyone at the company, the college student was thrown into a highly distressed mental state, the lawsuit stated.
> As a result, fearing his family would have to repay the huge loss, he killed himself, according to the lawsuit, filed in California state court.
The lawsuit isn't about Robinhood encouraging gambling but rather about the UI/UX being catastrophically misleading.
The Guardian article cited misses some key details that are contained here: https://www.cbsnews.com/news/alex-kearns-robinhood-trader-su...
>Later that night, at 3:26 a.m., the company sent an automated email demanding Alex take "immediate action," requesting a payment of more than $170,000 in just a few days.
He was then unable to actually get through to customer service due to lack of a phone number and no immediate reply via email.
The day after the suicide, this email was sent to him: >"Great news!" The email read, "We're reaching out to confirm that you've met your margin call and we've lifted your trade restrictions. If you have any questions about your margin call, please feel free to reach out. We're happy to help!"
Maybe there could be a bit of a higher bar of entry with a basic 10 questions forms to ensure that investors know the terminology. Akin to how you need to fill a questionnaire to determine your investor profile when investing through a mutual fund.
A lot of the anger with Robinhood comes down to the mistaken belief by many people that money moves instantly, trades happen instantly.
Robinhood UI is struggling to convey actual current value vs accrued unsettled value vs unrealized value.
These are non-trivial concepts. The time component of money confuses a lot of situations. Eg Most people treat retainers as revenue before it is earned; even SaaS companies treat MRR as earned before the time period elapsed and service is rendered. However this isn’t strictly correct or legal.
With a lot of these new Web services like Rh, GoPuff, Yelp, etc. it can be hard to get a hold of a real person in a timely manner.
The article in the top post is missing details. Robinhood actually demanded $170k from him to settle his account. It wasn't a UI issue.
Email is part of UI / UX. Either they were programmed loosely or the email was poorly worded.
Robinhood has similar moral liability of a payday lender: it's not wholly their fault if people choose to make bad choices for themselves, but they are partially responsible for enabling them and/or obsfuscating terms.
But in this instance, we're talking about pretty standard industry processes and practices.
If you hand someone a gun with the expectation they know how to use it, and the first thing they do is blow their brains out... not sure how that's on you?
> Monday’s lawsuit said Robinhood had an obligation to know its customers and ensure its trading strategies were appropriate, but instead the broker preyed on inexperienced investors.
Does robinhood actually have this obligation? Not knowing anything, I would assume they don't actually have to do this. Appropriate is subjective and nonsensical imo. Did the guy do something inappropriate? On one hand I think no, it wasn't especially crazy as a financial move. On the other hand, should a 20 year old who doesn't know anything be able to get involved in 100k margins? Idk. I do think robinhood preys on inexperienced investors. I'm interested to see how it can be argued as illegal.
Current law limits what many people can do in terms of the stock market specifically to protect unsavvy investors. What Robinhood is doing is no different than a 3rd party acting as a go between the stock market and an unsavvy investor but telling the unsavvy investor they went 700k+ in the hole.
The internet is slowly moving away from being the wild west, and things like this is a part of it.
As the circumstances show, this young man did not have a proper understanding of what his trades (including the not-yet-settled part) meant and what the actual financial consequences and risks were at that point of time when he (mistakenly) felt that they are horrific enough to take his life. Robinhood should have tested for that capability and, given the absence of it, ensured that he can not trade options on their platform and be limited to simpler, more understandable investment products. If they intentionally make this verification superficial so that they can get more unsophisticated investors trading tricky products on their platform, that is praying on investors and should be prohibited.
Re: your second paragraph, consumers / retail traders in Europe have to prove basic understanding of the stock market and the risks involved before they are allowed to trade stock (MIFID II [1]).
I've been involved in building a stock trading platform for a bank, both before this was a thing and while it was being implemented. I'm a customer there nowadays, and with my knowledge level I'm not allowed to trade in stock options. Probably for the best. I'm doing well enough with a low risk index tracker on the one hand, and 'play money' on the other that I can risk losing.
Incredible.
For example - brokerages keep you from trading on margin unless you have x money and y experience trading on margin and/or options.
You CANNOT invest into SpaceX (not pioneering SpaceX here, just an example) unless you are an accredited investor, that is, if you aren't RICH. Google does though.
These are serious disadvantages.
The real question is whether you want to be babied and coddled by people in power.
Edit: Deleted "controversial" topic sentence.
Believing that the government should restrict access to guns has nothing to do with being "babied and coddled by people in power" and everything to do with not wanting to be shot by someone else.
I do feel that a lot of the restrictions on amateur trader have the effect of barring "normal" people from making some of the best investments. I ought to be allowed to fail like the best of them. the catch here is that I don't bear all the risk if I fail. if I lose everything on a stupid trade, I am entitled to lean on my fellow taxpayers for support. some balance needs to be struck between allowing me to fail and requiring other people to pick me back up if I do.
The negative externalies of investment losses are costs to the public safety net, political distraction and the risk of a public bail out if the losses hit critical voting blocks.
You cannot be trusted with margin / options if you haven't proven that you know the risks. If I were a broker, I wouldn't let you trade if you wouldn't be able to cover a loss on options - I'm sure brokers have been defrauded before by people just disappearing or going bankrupt.
You can't play with millions if all you have to your name is a $600 stimulus check and a sock of rainy day money. That's irresponsible.
Stick to what you can afford and what you know about.
Nice powertrip. My turn.
I am a CFA w/ a Series 6/7/63 that has degree in Finance/Accounting/Stats and has written automated trading bots.
This was NOT enough experience for Fidelity to let me trade options (ironically, after I traded options for their clients working for them for 2 years in my youth), but my friend who listed no experience and a high net worth got margin and options trading enabled in his account.
There is a VERY fine line between "for your own protection" and "so that people who already have resources have more options."
Yes, there are gambles that can give great returns if you're lucky. And may even make sense as part of a diversified portfolio. That's the idea with VC of course. Though VC returns aren't actually that great in general.
Where I at least part ways is the people here who argue vehemently that there should be no line given that people can go to Vegas and gamble away their life savings. And, as I say, I don't actually think people are missing out on fantastic opportunities for unsophisticated small-time investors that they think they are.
The reason people go into these cycles of debt fueled poverty is because people just don't understand anything until it's too late.
How does one prove something like this in court?