Trader suicide puts heat on Robinhood investing platform

The death of a young investor who thought he’d lost heavily on Robinhood intensifies scrutiny of a site popular with millennials.

So-called day trading has boomed during coronavirus lockdowns.

The suicide of a young trader who thought he lost hundreds of thousands of dollars on Robinhood has intensified scrutiny of the online platform popular with millennials new to investing.

Alexander Kearns took his life on June 12 after his Robinhood account showed a negative balance of $US730,000 based on options trades.

“The emotional stress from the exposure caused him to take his own life,” tweeted Bill Brewster, a cousin by marriage of the 20-year-old Kearns and a financial analyst based in Chicago.

Kearns’ family believes Robinhood’s platform confused Alexander and did a poor job of explaining and accounting for complex financial trades, leading him to misinterpret the figures.

They think his account actually had a positive balance, but Robinhood has declined to release details because of privacy.

In a blog post, Robinhood co-founders Vlad Tenev and Baiju Bhatt said they were “personally devastated by this tragedy” and promised to revise the requirements for investing in options, bolster the platform’s educational resources and improve the user interface.

Tenev and Bhatt also announced a $US250,000 donation to the American Foundation for Suicide Prevention.

Robinhood was launched in 2013 with the stated goal of democratising access to Wall Street trading and eliminating commissions on trades of stocks, options and exchange-traded funds.

The platform also permits traders to buy fractions of shares of more expensively-priced companies and grants free stock to new customers.

The Robinhood app on a smartphone. Picture: AFP

The company is among a spate of “fin tech” upstarts that are remaking money and finance with smartphone-oriented technology. Robinhood raised $US280 million in fresh capital in May.

Users are humoured by features like an explosion of virtual confetti after each transaction, and can keep lists of favoured stocks to follow.

In early May, Robinhood reported accounts on the platform had reached 13 million following a surge in new customers as a result of lockdowns due to the coronavirus.

That was a much bigger increase in new customers compared with Charles Schwab, TD Ameritrade and E*TRADE, even if the older firms had much higher-valued accounts.

Many of the new users of Robinhood are day traders attracted to penny stocks -- a category shunned by big-time investors.

However a number of the fledgling traders have actually done well this year, according to an analysis by Societe Generale of trades since the beginning of the year.

“Their timing back into the market looks impeccable with a significant pick-up in holdings as equity markets bottomed in mid-March,” the French bank said in a recent note.

But there were questions about Robinhood even before the Kearns tragedy. The platform’s revenues are based on subscriptions to its premium service, as well as payments from market makers for routing their orders.

The latter is often a source of compensation for brokerages, but it is controversial because of its opacity and would seem to contradict Robinhood’s commitment to transparency.

The platform is vulnerable to technology outages and has also had some stumbles as it has introduced new products such as a high-yield savings account.

But the biggest criticism has been over the lack of protections for retail investors.

“Robinhood makes it far too easy for young, inexperienced, low-account balance investors to get into risky investing behaviours that they are neither educated enough nor experienced enough to engage in,” said Tara Falcone, a certified financial planner and the founder of ReisUP, a financial literacy service.

Robinhood permitted investments in cryptocurrencies likes bitcoin without warning of the risks involved, Falcone said, and though the company’s statements since Kearns’ suicide suggest progress, it needs to go much further.

“Democratising access to investing is a wonderful mission and they’ve clearly done a tremendous job in doing so,” she said.

“But with that type of freedom comes a lot of responsibility. Some of that is on the shoulders of the individuals engaging in these acts, but I also believe that Robinhood has a responsibility to their stakeholders.”

* If you or someone you know may be at risk of suicide, call Lifeline (131114), Kids Helpline (1800 551 800), Beyond Blue (1300 224 636)

AFP