Robinhood users say trading app won’t cash out on their profitable bets against Silicon Valley Bank
Iif there was a “Robinhood controversy” You’re in luck on your 2023 banking crisis bingo card. They just called the square. Unlike the big meme stock market rally of 2021, this brouhaha revolves around put options and the inability of brokerage app users to cash in on the collapse of Silicon Valley Bank and Signature Bank, even if their bets are in the money.
Put options are a way for investors to bet that the price of a stock will fall. If the share price falls, the trader can sell the shares at a higher price than the market value, thus making a profit. Or they could sell the contract to someone else who thinks the stock will fall even further. When it works, it’s like winning the lottery, with the added bonus of enjoying someone else’s failure.
For Silicon Valley Bank and Signature Bank, some Robinhood users saw the writing on the wall and bought put options on the stock before it collapsed. Of course the banks collapsed. It should have been a surprise to those who saw that there was trouble.
The problem is that according to users of the trading app, Robinhood does not allow them to sell their contracts or get paid. Most of the contracts expire on Friday. This confused some of them.
Robinhood, which did not immediately respond to requests for comment, has reasons for not letting users take advantage of its options. The shares are no longer traded, so it’s a bit of a logistical nightmare to buy the shares if they don’t already own them to fulfill the contract. There aren’t many people looking to buy the contracts right now, as the stocks are already on the table and there isn’t much, if any, downside left to take advantage of.
According to retail options traders, Robinhood isn’t the only exchange that isn’t going through. Fidelity, which did not immediately respond to a request for comment, also slammed social media for not paying. It’s no surprise that Robinhood is the punching bag of choice given its history.
That doesn’t stop users from asking the most important question of all: why were they allowed to buy shares they didn’t own in the first place if it was a condition of payment if such a situation arose?
The Robinhood mobile trading app is designed to democratize finance, bring the power of the markets to the people, and disrupt the old boys’ club on Wall Street. Yet when the big meme stock rally of 2021 erupted, Robinhood froze like a frightened puppy as rising demand for GameStop and other hot stocks threatened to overwhelm the platform’s infrastructure. It turned out that the company’s pocketbook wasn’t deep enough to handle the sudden spike in trades, leaving Robinhood afloat for more than it could afford. The result was a near-death experience followed by congressional hearings bordering on must-see TV and a year-long investigation by the House Financial Services Committee that concluded the app was closer to frivolity than it let on at the time.
Just like the meme stock episode, this week’s simmering put option scandal shows that even the best bets can become worthless.
There is a bit of irony in the situation. In 2021, WallStreetBets users complained that, among others, Gabe Plotkin’s Melvin Capital held naked short positions against GameStop — meaning they didn’t have GameStop stock to back their bets on the stock. Well, Robinhood and other brokers say that put contracts, which are clearly not the same as naked shorts, cannot be executed because the shares cannot be bought. It’s all a bit on the nose.
As Twitter lights up with complaints from Robinhood users, well-known short-seller Marc Cohodes has some advice: call a lawyer. It also promises “hell to pay” if Robinhood or any other broker “screws Joe Six-Pack.” Stay tuned.