A Reckoning for Robinhood
June 25, 2020 2:52 PM   Subscribe

Alex Kearns, a student at the University of Nebraska, killed himself after mistakenly believing he owed $730,000 on the Robinhood stock-trading app. Robinhood have announced changes to the app's UI and other educational resources, but the app has a long history (WSJ) of making trading feel like gambling or gaming, including the infamous "infinite money" glitch. "Was it the startup’s responsibility to do a better job with design, ethics and friction to better guard against kids like him from going into a fatal tailspin? Yes. Yes. And yes again," says Kara Swisher (NYT). [CW: Discussions of suicide]
posted by adrianhon (45 comments total) 21 users marked this as a favorite
 
User Interface: In the near term, we are rolling out improvements to in-app messages and emails we send customers about their multi-leg options spreads. We are also adding detail to the in-app history page to help users understand the mechanics of early options assignments. We are also working on changes to our user interface, including the way buying power is displayed. These changes will take a bit of time to roll out, but our teams are hard at work.
Bzzt! Wrong answer. The correct answer is: We are disabling all multi-leg options trading, effective immediately, until we rewrite our UI so that it doesn't incorrectly tell people they've just lost a life-destroying amount of money.
posted by theodolite at 3:07 PM on June 25 [46 favorites]


If it's possible to actually lose money on this, isn't it literally a gambling app? Shouldn't it be regulated by whatever gaming commission has jurisdiction? (Apologies if I've missed something...)
posted by klanawa at 3:16 PM on June 25 [7 favorites]


Robinhood is an investing app, primarily for stocks but also options, gold, and cryptocurrencies. There are lots of other investing apps out there but Robinhood has a very low barrier to entry, hence its novice users.
posted by adrianhon at 3:20 PM on June 25 [5 favorites]


Robinhood announced a commitment to more investment in app education resources, significant changes in its interface around options and a $250,000 donation to suicide prevention.

God these evil motherfuckers. I don't know where to begin raging. The VC economy that decided to value them as anything more than parasites on the back of an already-evil day-trading business? The federal regulations that let them get away with crediting hundreds of thousands of dollars to kids with no credit? The fact that Reddit hosts toxic communities like this and faces no backlash? The proposed set of changes being limited to "in app education resources" rather than to the entire business model?

.003% of the company's net worth. Equivalent to you or me being accosted by a homeless person, and dropping a sliver of a penny into the cup. That's their response to their platform killing a young man, Sure, guys. That'll DEFINITELY undo the damage you've done. And keep the regulatory agencies in California from crushing you like a paper cup.
posted by Mayor West at 3:21 PM on June 25 [35 favorites]


I briefly worked as a trader at an HFT firm, and part of that was cobbling together UIs specific to the desk from trade data - including profit/loss meters. They suffered a string of incidents like the one that Kearns died from before I got there - and then they ran into the opposite problem where they had conditioned themselves to treat losses of really high magnitude as bugs in the arithmetic and ignored a 125k loss caused by a bug for an expensive 2 minutes.

Which is all to say, this shit is so hard that the people whose job this literally is regularly run into difficulties of this type, and they have both access to more expertise and more capital. Retail investing really should not exist. It's as if Walmart let you gamble on which store locations were more profitable and kept the vig.
posted by PMdixon at 3:33 PM on June 25 [21 favorites]


...and yeah fintech as a whole takes all the evils of VC and all the evils of bucket shops and all the evils of social media and all the evils of freemium gaming and looks at them and says "that's a really great start for brainstorming"
posted by PMdixon at 3:36 PM on June 25 [24 favorites]


> Retail investing really should not exist.

My hope is that we can salvage the the good things (zero fee long term investing in low cost mutual funds / ETFs) when we destroy the bad things (all of /r/wallstreetbets)
posted by pwnguin at 3:42 PM on June 25 [7 favorites]


Not to mention their service routinely goes down during heavy trading days.
posted by msbutah at 3:50 PM on June 25


Banning retail trading is silly in my opinion, in part because I think it would just make it easier for banks to even skim more off of what us plebs are allowed to invest our savings in. I think some sort of test or certification for options trading is a good idea though.
posted by MillMan at 3:55 PM on June 25 [5 favorites]


Robinhood is an investing app, primarily for stocks but also options, gold, and cryptocurrencies

Right, gambling it is.
posted by Abehammerb Lincoln at 4:04 PM on June 25 [26 favorites]


You know, a group of 20 year olds could get together to execute trades that would result in all but one of them becoming bankrupt, while the other becomes quite rich - by the standard of 20 year olds of course. That age is probably the least harmful time to become bankrupt; it's not necessarily a bad bet even for the losers.
posted by Joe in Australia at 4:09 PM on June 25 [2 favorites]


Let's just bring back tontines.
posted by Kadin2048 at 4:14 PM on June 25 [9 favorites]


Kadin2048, looks like someone's way ahead of you.
posted by Abehammerb Lincoln at 4:23 PM on June 25


I don't even... how did he... where did the money even come from?
posted by Saxon Kane at 4:24 PM on June 25 [4 favorites]


It's kinda insane that "investing" isn't governed the same way gambling is, and it's kinda insane that "gambling" isn't governed the same way surgery is.
posted by lucidium at 4:45 PM on June 25 [5 favorites]


Robinhood has a very low barrier to entry, hence its novice users.

And apparently has no issue with letting these novice users have access to options/derivatives without a proper KYC (know your client) that would have weeded them out. If the account was really that far in deficit, the broker issues a margin call and liquidates assets to cover the shortfall if it isn’t paid long before the assets in the account outweigh the deficit. An experienced investor in these kinds of instruments understands that. A kid who downloaded an app from the Apple store probably doesn’t.
posted by dr_dank at 4:47 PM on June 25 [7 favorites]


The money was never really real in a sense. The negative balance was, as I understand it, a temporary side-effect of the way options and stock trades are settled and Robinhood's terrible UI. Forbes had an article that speculates on how it could have happened:
Here’s an example of how a bull put spread could produce an unexpectedly large stock position in your portfolio. On June 16, Amazon (AMZN) trades at $2,615 per share. If you’re neutral to bullish on Amazon, you could sell put options that expire on July 17 with a $2,615 strike price for $28 per option. To limit your risk, the other leg of the trade is to purchase puts at a lower strike price, $2,610, for a cost of $26. That two-dollar differential (multiplied by 100) generates $200 for every contract you sell. Do three contracts and you generate $600. If Amazon closes on July 17 above $2,615, you’re in the clear and keep all of the proceeds, as both puts expire worthless. If the stock closes below $2610, you will encounter your maximum loss of $900: $5.00 (difference between strike prices) minus $2.00 (proceeds earned up front) times three contracts.

When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.

Kearns may not have realized that his negative cash balance displaying on his Robinhood home screen was only temporary and would be corrected once the underlying stock was credited to his account. Indeed it’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised—even if the portfolio remains positive.
But Robinhood made it all seem like a game and obscured all those details behind a sparkly UI until it showed the giant negative balance, which obviously looks extremely real and awful.
posted by zachlipton at 4:49 PM on June 25 [21 favorites]


...a group of 20 year olds could get together to execute trades that would result in all but one of them becoming bankrupt, while the other becomes quite rich...
If your intention is to borrow a bunch of money, invest it riskily, and either become rich or bankrupt, you don't need a group of people to do that.

If your intention is that the group of friends would all own an equal share in the one friend's winnings, the "cool hack" you just thought of is called "bankruptcy fraud" and any bankruptcy judge or trustee will see right through it.
posted by Hatashran at 4:54 PM on June 25 [20 favorites]


The article in Forbes stated that he had a cash balance of about $16,000. That was presumably his buy-in, plus or minus whatever he had gained or lost already.

They speculate that the bet trade that he was trying to execute was a "bull put spread".
posted by Kadin2048 at 4:56 PM on June 25 [1 favorite]


making trading feel like gambling or gaming

Even for professionals that’s exactly what it is.
posted by Tell Me No Lies at 5:11 PM on June 25 [9 favorites]


I hope whoever designed that interface feels like they're responsible for this death and lets that motivate them to make better choices in the future.
posted by bleep at 5:20 PM on June 25 [2 favorites]


I also hope this kid's family sues this company into oblivion.
posted by bleep at 5:21 PM on June 25 [10 favorites]


If your intention is to borrow a bunch of money, invest it riskily, and either become rich or bankrupt, you don't need a group of people to do that.

I was thinking more of the consequences for Robinhood. In fact if people are leveraging themselves to this extent on their platform there must be many people going bankrupt already - who's their underwriter?
posted by Joe in Australia at 5:25 PM on June 25


fintech as a whole

Back during my horrible prolonged job hunt of 2016-2017, I almost applied to a bunch of fintech places because they were looking for Python developers (and Python is my bag, baby). Even in my desperation, though, I didn't...even though jobs like that pay just, like, stupid money. I liked the idea of not working in a sterile Canary Wharf office until the stress of having my soul slowly drained out of my body drove me into a heart attack in my early fifties.
posted by Mr. Bad Example at 5:30 PM on June 25 [1 favorite]


If it's possible to actually lose money on this... Shouldn't it be regulated by whatever gaming commission has jurisdiction?

Let me tell you about complex derivative trading, and various long cons contained therein, including the Gaussian Copula. This kind of gambling has bigger players and bigger losers, and less flashing lights than a one-armed bandit, but the house still always wins.
posted by SaltySalticid at 5:46 PM on June 25 [2 favorites]


please add the suicide tag to your post so folks can filter out as needed using MyMefi.
posted by lazaruslong at 6:21 PM on June 25 [12 favorites]


"When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday."


I find this all very confusing. So wouldn't this mean that he actually had to buy this stock for $784,500?
posted by jonathanhughes at 6:32 PM on June 25 [2 favorites]


who's their underwriter?

Calvin Coolidge.
posted by clavdivs at 7:00 PM on June 25 [4 favorites]


One wonders if the brand similarity to Pied Piper is intentional.
posted by RobotVoodooPower at 7:25 PM on June 25


So wouldn't this mean that he actually had to buy this stock for $784,500?
Yes. That's where the -$784,500 balance comes from, they forced him to buy $784,500 of stock. Which he can - and probably automatically must - immediately sell for about the same amount, limiting his actual loss to not more than a few hundred dollars, and giving him a profit if the stock has moved differently.

The UI problem is because the purchase part of the transaction was shown but not the sale part.

Imagine if your paycheck came to you withholdings first, and then the actual wages a day later. You'd have a brief drop of hundreds of dollars in your checking account but a big deposit the next day.
posted by Hatashran at 7:37 PM on June 25 [13 favorites]


I find this all very confusing. So wouldn't this mean that he actually had to buy this stock for $784,500?

You'd think so, but that's not the way options are usually handled under the covers.

Say I sell you the option to sell some stock at $10 on Monday. Monday comes by, the stock is trading at $9. The net result is that I am out $1 share.

But the stock does get bought and sold right? Yes, but not by me. Behind the scenes my broker purchases the stock at the higher price, sells it at the lower, and debits my trading account for the difference. I don't ever have to see it happen.

Except that for some reason Robinhood did decide to expose everyone to the mechanics and in a particularly clumsy way.
posted by Tell Me No Lies at 7:46 PM on June 25 [4 favorites]


But the stock does get bought and sold right? Yes, but not by me.

Except in this example, selling a put, you do have to buy the stock and you need $784,500 to do it.

What will happen is the purchase will execute on Friday. You will have until settlement on the second day, Tuesday, to put up the $784,500 cash in your account for your purchase, typically by wire transfer. When you fail to do that, the brokerage will force a liquidation sale at the current market price.

So you owed the broker $784,500 for the stock you bought, and when you don't pony up the cash, they sell it for you for approximately $784,500 and everything is even except for whatever minor change there is in stock price over those two days.

But your failure to pay up by the settlement date will earn you a "freerider violation". The broker may suspend your account for some period as a penalty. But that's the worst of it. You won't be out a huge chunk of cash. You bought the stock and sold it two days later for the same amount. All is square.
posted by JackFlash at 8:08 PM on June 25 [4 favorites]


Except in this example, selling a put, you do have to buy the stock and you need $784,500 to do it.

It’s been a long time since my trading days so I’m going to assume I opted in for automatic settlement.

It does seem very odd to me that Robinhood would extend a $784,000 margin to a 20-year-old kid. I suppose they’re not really extending a margin as I’m guessing they put some fairly strict rules around what can happen with that stock.
posted by Tell Me No Lies at 8:36 PM on June 25


I still don’t totally understand how they are even able to offer options accounts like this. I remember Merrill turning me down for options years ago on the basis of my account age and inexperience. I remember them framing it as a matter of following the rules. Did we deregulate ourselves into this, too?
posted by feloniousmonk at 8:40 PM on June 25 [7 favorites]


The fact that Reddit hosts toxic communities like this and faces no backlash?

Thinking about the intersection of "Reddit" and "stock trading" doesn't bring a lot of positive images to mind, but unless I'm missing some details about the role WSB played in Kearns' death I have a hard time blaming those guys too much. They make it pretty clear that what they're doing is gambling - from the name on down - and they're not really doing much that far richer people don't get away with on a larger scale. Of course, hanging out with people who are sharing their gambling wins will make you feel like you could win, too, but it's the people who are granting access to complex trading with few barriers to entry who are running a massive and morally dubious experiment.
posted by atoxyl at 8:58 PM on June 25 [4 favorites]


I still don’t totally understand how they are even able to offer options accounts like this. I remember Merrill turning me down for options years ago on the basis of my account age and inexperience. I remember them framing it as a matter of following the rules. Did we deregulate ourselves into this, too?

I believe you do have restrictions starting out, and you have to apply for successive increases in your level of access to more complex trades. Anecdotally RH seems to make it easier to do this than its competitors that are attached to more traditional brokerage firms, though?
posted by atoxyl at 9:04 PM on June 25


These trades are too complicated for anyone who isn’t a professional investor and as we saw in the 2009 financial crisis they are mostly too complicated for professional investors.
posted by interogative mood at 9:05 PM on June 25 [7 favorites]


Even for professionals that’s exactly what it is.

Naive question, maybe a bit OT: would be accurate to say that the larger and more diverse your portfolio is, the more its value tracks the growth in the economy in general? And the smaller and less diverse it is, the more stochastic? So playing the market is really less risky, the larger you get, right? If that's the case, it really seems like opening up the market to small traders is just a way to consolidate wealth to the larger ones.

Plus ça change, etc...
posted by klanawa at 11:40 PM on June 25 [1 favorite]


I'm really disturbed by the reporting on this young man's death, attributing his suicide to one factor, telling us the method, sharing some of his note, and explaining that his death has provoked a positive change.

This is basically a how-to example of how not to report someone taking their own life.

For better resources, here is a link to Samaritan's page of reporting on suicide. (Link)
posted by Braeburn at 11:55 PM on June 25 [30 favorites]


Naive question, maybe a bit OT: would be accurate to say that the larger and more diverse your portfolio is, the more its value tracks the growth in the economy in general? And the smaller and less diverse it is, the more stochastic? So playing the market is really less risky, the larger you get, right? If that's the case, it really seems like opening up the market to small traders is just a way to consolidate wealth to the larger ones.

Sort of but even very small investors can essentially buy a small slice of the whole global market and get this diversification through buying index funds. I actually have all kinds of finance qualifications and I invest all of my money in one massively diversified global equity fund.

The way RobinHood makes money without commission by the way is that they sell their order flow to brokers to execute.

Why would brokers want to buy the right to execute these orders? They make their money by executing the trade and earn a small spread between the buy price and the sell price but that is only risk free if the trades they accept are uninformed, "dumb money".

Brokers usually execute small trades without actually buying/selling on the market, using stocks they have already bought and hold for that purpose. That means though, that if you sell them a lot of stock right before that stock drops, you're costing them money.

Let's say that you're a broker and your client is a super well informed trader in energy stocks. If they are executing a buy or sell order, there is a chance that it's for a good reason and those stocks are about to start moving. You therefore have a chance of being caught mid trade and lose money.

If you're executing a flow of orders from Robin Hood / wallstreetbets guys there is no chance that you'll get picked off because it's the ultimate dumb money.
posted by atrazine at 1:09 AM on June 26 [14 favorites]


I'll go against the grain here, as I suspect will be the case in many threads moving forward.

Is it an app's fault if you commit suicide? People have killed themselves after getting in arguments on Twitter and bullying in Facebook. Are these platforms liable for the deaths of their users?

Or is it that some people are suicidal a priori and the app just happens to be the justification for their death?
posted by deathpanels at 7:42 AM on June 26 [3 favorites]


Is it an app's fault if you commit suicide?

People are legally liable for contributing to suicide. Twitter and Facebook are irrelevant because they were simply the platforms other people used to contribute to suicides; the poor design of the Robinhood App had a direct effect on the user.

Add in the fact that corporations are legally people, and the makers of Robinhood have a problem on their hands.
posted by Tell Me No Lies at 8:11 AM on June 26 [7 favorites]


as I suspect will be the case in many threads moving forward

steady on boys, we got an iconoclast here
posted by ominous_paws at 8:37 AM on June 26 [7 favorites]


> The way RobinHood makes money without commission by the way is that they sell their order flow to brokers to execute.

Not necessarily. That was their original pitch, yes, but Pactrick McKinzie, a mildly HN-famous blogger, suggests that discount brokerages have many sources of revenue, and order flow is a tiny portion of that. To briefly remix his blog post:

Payment for order flow is a minor footnote to the story of discount brokerages...
57% of Schwab’s revenues are from net interest. The firm could literally give away every other service; discount the mutual fund fees to zero, do away with commissions, etc etc, and they would still be profitable....

Suppose I were to give you $200 billion dollars. Now I’m the American middle class and you’re Charles Schwab. You would earn something like $5.8 billion dollars in net interest income. This would entirely pay for your sideline business in running a brokerage. Stocks, bonds, mutual funds, branch offices, call centers, blah blah blah, it all exists to justify the only pricing page that matters, and all the verbiage on the pricing page is about how much you pay the customer.

Some people get mad about the financial industry for taking advantage of customers. I find it hard to get mad about a deal between willing counterparties, but if you think that Wall Street is soaking the US middle class, you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost.


I should note that the above was written about a year ago, before the tragic events we discuss today. Patrick had some sharp words to share about Robinhood and its customers, but they were not informed by recent events. tl;dr there: robinhood makes bonus money from options order flow, but their long term game plan is likely still net interest.
posted by pwnguin at 10:03 AM on June 26 [6 favorites]


When I first heard about Robinhood I just assumed it was a modern version of the Bucket Shop of the pre 1929 stock trading landscape. A bucket shop was basically a gambling hall where the shop was a bookie dressed up as a broker, profiting directly from its "clients" losses.
posted by Pembquist at 8:39 PM on June 26


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