The last time Robinhood got into hot water with its users, CEO Vlad Tenev was dragged before Congress. Photographer: Daniel Acker/Bloomberg
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IIf you had a “Robinhood controversy”. on your 2023 banking crisis bingo card, you’re in luck. The square has just been called. Unlike the big meme stock rally of 2021, this brouhaha is about put options and how broker app users are unable to capitalize on the collapse of Silicon Valley Bank and Signature Bank, even if theirs bets are in the money.
Put options are a way for investors to bet that a stock’s price will fall. If the stock falls, the trader can sell the shares at a price higher than the market value and make a profit. Or they can sell the contract to someone else who thinks stocks will fall even further. When it works, it’s like winning the lottery, with the added bonus of being able to celebrate someone else’s failure too.
In the case of Silicon Valley Bank and Signature Bank, some Robinhood users saw the writing on the wall and bought put options on the shares before collapsing. Of course, the banks collapsed. It should have been a godsend for those who saw trouble brewing.
The problem, according to trading app users, is that Robinhood doesn’t allow them to sell their contracts or get paid. Many contracts expire on Friday. This upset some of them.
Robinhood, which did not immediately respond to requests for comment, has its reasons for not letting users exercise their options. The shares are no longer traded, so buying the shares if you don’t already own them to fulfill the contract is a logistical nightmare. There aren’t many people wanting to buy the contracts right now as the stocks are already on the operating table and there isn’t much, if any, downside left to take advantage of.
According to options traders, Robinhood isn’t the only exchange not taking off. Fidelity, which didn’t immediately respond to requests for comment, was also slammed by social media for not paying. Not surprisingly, given its history, Robinhood seems to be the punching bag of choice.
That doesn’t stop users from asking themselves the all-important question: why were they even allowed to buy put contracts on stocks they didn’t own in the first place if that was a condition of the payout if such a situation played out?
Robinhood’s mobile trading app was designed to democratize finance, bring the power of markets to the people, and disrupt Wall Street’s Old Boys Club. But by the time the great rally in meme stocks of 2021 broke out, Robinhood was frozen like a terrified puppy as rising demand for GameStop and other meme stocks threatened to overwhelm the platform’s infrastructure. As it turned out, the company’s wallet wasn’t big enough to handle the rapid increase in trades, leaving Robinhood to blame for more than it could afford. The result was a near-death experience, followed by congressional hearings that bordered on must-see TV, and a year-long investigation by the House Financial Services Committee that concluded the app was closer to flatlining than it suggested at the time.
Just like the stock meme episode, this week’s simmering put options scandal shows that even the best bets can be worthless.
The situation has a touch of irony. In 2021, WallStreetBets users complained that Gabe Plotkin’s Melvin Capital, among others, held naked short positions against GameStop — meaning they didn’t own GameStop stock to fulfill their bets against the stock. Now Robinhood and other brokers are saying that put contracts, which, to be clear, are not the same as naked shorts, cannot be executed because the shares cannot be bought. It’s all a bit too on the nose.
As Twitter lights up with complaints from Robinhood users, well-known short seller Marc Cohodes offers a little advice: call an attorney. He also promises that there will be “hell to pay” if Robinhood or any other broker tries to “fuck Joe Six-Pack.” Stay tuned.