Lawmakers grill Robinhood following 20-year-old trader’s suicide
The brokerage app provider Robinhood should improve its consumer protections, congressional lawmakers say, following the suicide of Alex Kearns, a 20-year-old investor who had a negative balance of $730,000 on his account.
In a letter addressed to Robinhood co-founders Vladimir Tenev and Baiju Bhatt, lawmakers press the company on how it determines which users can access risky investment strategies like options trading.
“Robinhood has been very successful in marketing itself as an easy to use and low-cost brokerage service among first-time retail investors, especially in recent months,” the letter states. “By seeking to cultivate a customer base of relatively inexperienced investors, you have also taken on an especially great responsibility to make sure your customers are protected and always provided with clear and accurate information.”
The letter includes 10 questions on Robinhood’s options trading and how the firm determines which users are eligible to participate, among other queries.
Rep. Brad Sherman, chairman of the House subcommittee on investor protection, entrepreneurship and capital markets, signed the letter with Illinois Sens. Richard Durbin and Tammy Duckworth. Rep. Lauren Underwood, Rep. Sean Casten and Rep. Bill Foster, who chairs a task force on artificial intelligence, added their names.
The lawmakers did not respond to requests for additional comment.
In a suicide note shared on Twitter by his family, Kearns asks why “a 20-year-old with no income” was able to get nearly $1 million worth of leverage.
“There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned,” Kearns says in the post, adding he had “no clue” what he was doing.
The lawmakers call Kearns’s death “heartbreaking” and “highly alarming.”
Tenev and Bhatt published a blog post in June proposing changes to Robinhood’s options trading, including additional criteria for customers to trade options, more educational content and improvements to the user interface, such as messages to customers and how information is displayed in the app.
“We take our responsibility to our customers seriously and will work with the representatives and senators to address their questions and concerns,” a Robinhood spokesperson said in a statement emailed to Financial Planning.
Lawmakers wonder if these changes will “have any meaningful impact” on how Robinhood enables and encourages neophyte investors to participate in risky trading.
“[The] lack of safeguards appears to correspond with Robinhood users engaging in much more high-risk and frequent trading activity relative to customers of other retail brokerages,” the letter notes.
In the first quarter of 2020, the number of options trades per dollar in an average Robinhood account was 10 times higher than its next closest competitor, according to The New York Times.
This is generating “outsized” revenue for Robinhood, which sells trades to third-party firms to execute, the lawmakers claim.
The Financial Industry Regulatory Authority fined Robinhood $1.25 million in December for failing to “reasonably consider” factors including price movement when evaluating broker-dealers who execute trades.
The letter also raises concern about outages of Robinhood’s trading platform in recent months during periods of market volatility. FINRA is investigating the outages and at least one user has filed a lawsuit.
Despite the challenges, Robinhood raised an additional $320 million earlier this week, valuing the company at $8.6 billion.