Robinhood Under Scrutiny by Congress
Several lawmakers aren't satisfied with the platform's response to a customer's suicide.
Several members of Congress led by Brad Sherman, D-Calif., want no-fee online brokerage Robinhood to prove it has done all it can to protect inexperienced investors from high risk trading that can potentially cause large losses.
About a month ago Alex Kearns, who described himself as a “20-year-old with no income” was approved by Robinhood to trade options on margin and killed himself after the website displayed that his account had a negative balance of $730,000.
“There was no intention to be assigned this much and take this much risk. I only thought I was risking the money that I actually owned,” wrote Kearns in a suicide note that a family member posted on Twitter. The negative balance didn’t reflect trades that hadn’t closed.
Following Kearns’ death Robinhood co-founders and co-CEOs Vlad Tenev and Baiju Bhatt announced that the firm was “considering additional criteria and education” for customers seeking authorization to trade complicated (level 3) options strategies, rolling out improvements to in-app messages and emails to users about their “multi-leg options spreads” and expanding educational content on options trading.
Related: After Investor’s Suicide, Robinhood Updates Trading Platform)
Sherman, who chairs a House subcommittee on investor protection, plus five Democratic lawmakers from Illinois, where Kearns lived, sent a letter to the Robinhood executives, questioning whether those proposed changes “will have any meaningful impact” on how the platform “enables and encourages inexperienced investors to engage in high risk trading.”
The average Robinhood customer trades 10 times the number of options per dollar than traders using the platform of Robinhood’s closest competitor, which “underscores the need for Robinhood need to prove it is taking every appropriate step to make sure its customers are not being put in harm’s way,” the letter notes. ”For Alex Kearns and all of its users Robinhood must do better.”
The letter requests the two Robinhood executives answer 10 questions in writing by July 24 about its operations. Among other responses, it requests an explanation of the firm’s eligibility criteria for options trading, its knowledge about customers’ age and experience to qualify for complicated options trades and use of margin trading, and details on the planned improvements to its platform, along with an updated timeline.
The letter also notes that Robinhood doesn’t have a customer support phone line and asks whether it has plans to add one.
In addition to Sherman, the letter was signed by Democratic Reps. Lauren Underwood, in whose district Kearns lived; Reps. Bill Foster and Sean Casten, who sit on the investment protection subcommittee; and Democratic Sens. Tammy Duckworth and Dick Durbin.