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Kearns may not have realized that his negative cash balance displaying on his Robinhood homescreen was only temporary and would be corrected once the underlying

Kearns may not have realized that his negative cash balance displaying on his Robinhood homescreen 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. “Tragically, I don’t even think he made that big of a mistake. This is an interface issue, they have slick interfaces. Confetti popping everywhere,” says Brewster referring to the shower of colorful confetti Robinhood routinely deploys after customers make trades. “They try to gamify trading and couch it as investment.” Am I reading this correctly and he really wasn't in the hole badly, but a crappy presentation of information broke him? Firstly, if someone reading this is in the same situation, take a breath and know this is not Student Loans, you are young and bankruptcy is about as bad as its going to get. If you are the interface designer, well, I don't know what to say to you other that sort your damn self out. Its your job not only to convey the truth, but show what the final result is approximately going to be. Conveying just the current facts is as misleading as outright lying.

deleted 6y ago
[deleted]
birdyrooster 6y ago
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?
- bmh100 6y ago
  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.
- greatjack613 6y ago
  correct, unless he bought on margin, which should have triggered a margin call when he was unable to cover his position, but still unclear.
- deleted 6y ago
  [deleted]
- meritt 6y ago
  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.
  - birdyrooster 6y ago
    The article says the account was not authorized for margin trading so how in the world could this even happen?
    - meritt 6y ago
      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.
- deleted 6y ago
  [deleted]
- wallawe 6y ago
  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.
  - cesarb 6y ago
    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?
    - gen3 6y ago
      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.
    - retzkek 6y ago
      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.
slg 6y ago
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.
- manigandham 6y ago
  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.
  - dragontamer 6y ago
    I find it highly unlikely that the "other leg" of his option contract was worth zero.
    - manigandham 6y ago
      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.
    - cheald 6y ago
      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.
superfrank 6y ago
> 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?
- cma 6y ago
  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.
- et2o 6y ago
  How would you suggest to limit option trading?
  - jakkyboi 6y ago
    Going through a mandatory guide
    - erikbye 6y ago
      The broker I use has a mandatory quiz you have to pass, not only for options, but for ETFs, etc.
  - stefano 6y ago
    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.
mylons 6y ago
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.
- manigandham 6y ago
  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.
  - mylons 6y ago
    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.
    - manigandham 6y ago
      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.
llsf 6y ago
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.
klmadfejno 6y ago
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.
- ryanfreeborn 6y ago
  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.
standardUser 6y ago
"...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.

deleted 6y ago

[deleted]

birdyrooster 6y ago

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?

bmh100 6y ago
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.
greatjack613 6y ago
correct, unless he bought on margin, which should have triggered a margin call when he was unable to cover his position, but still unclear.
deleted 6y ago
[deleted]
meritt 6y ago
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.
- birdyrooster 6y ago
  The article says the account was not authorized for margin trading so how in the world could this even happen?
  - meritt 6y ago
    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.
deleted 6y ago
[deleted]
wallawe 6y ago
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.
- cesarb 6y ago
  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?
  - gen3 6y ago
    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.
  - retzkek 6y ago
    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.

slg 6y ago

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.

manigandham 6y ago
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.
- dragontamer 6y ago
  I find it highly unlikely that the "other leg" of his option contract was worth zero.
  - manigandham 6y ago
    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.
  - cheald 6y ago
    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.

superfrank 6y ago

> 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?

cma 6y ago
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.
et2o 6y ago
How would you suggest to limit option trading?
- jakkyboi 6y ago
  Going through a mandatory guide
  - erikbye 6y ago
    The broker I use has a mandatory quiz you have to pass, not only for options, but for ETFs, etc.
- stefano 6y ago
  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.

mylons 6y ago

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.

manigandham 6y ago
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.
- mylons 6y ago
  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.
  - manigandham 6y ago
    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.

llsf 6y ago

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.

klmadfejno 6y ago

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.

ryanfreeborn 6y ago
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.

standardUser 6y ago

"...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.