Robinhood’s New Traders Ignore Danger Signs to Bet on Stocks – ValueWalk Premium
Investors

Robinhood’s New Traders Ignore Danger Signs to Bet on Stocks

Rich hedge fund managers are talking about it. So are not-so-rich millennials. And fast-twitch gamers, and bored sports fans and — in all likelihood — some 15-year-olds you know.

Q1 2020 hedge fund letters, conferences and more

Investors

The “it” is Robinhood Financial’s trading app, which is throwing jet fuel on the speculative fires of coronavirus-era equity markets. Not since the dot-com mania of the 1990s, when starry-eyed day traders dreamed of online riches, has a brokerage platform drawn such a frenzied following. Skeptics warn the hype could set up home-bound novices for disaster.

The rush of newbie investors flocking to Robinhood has sparked controversy over how much they’re influencing markets, and whether it’s appealing to those seeking to gamble at a time when casinos are closed and major sporting events are canceled.

Robinhood drew more scrutiny this week after a young user’s death, which his family has called a suicide based on a note he left.

Alexander Kearns, 20, killed himself after his Robinhood account showed a negative balance of more than $700,000, according to a series of tweets by his relative Bill Brewster. The figure may have been temporary and would have been updated when stocks underlying his assigned options settled to his account, according to Brewster. But Kearns believed it reflected how much leverage he had, according to the note, which was provided to Bloomberg by his family.

Robinhood pledged to change elements of its options trading platform on Friday, in response to Kearns’s death. Its co-founders said they would alter how buying power is displayed in the app, and consider additional eligibility requirements for users seeking to employ more advanced options strategies. They also said Robinhood would make a $250,000 donation to the American Foundation for Suicide Prevention.

“We are personally devastated by this tragedy,” according to the blog posting written by Baiju Bhatt and Vlad Tenev.

“It is not lost upon us that our company and our service have become synonymous with retail investing in America, and that this has led to millions of new investors making their first investments through Robinhood,” they said. “We recognize this profound responsibility, and we don’t take it lightly. Our aspiration is to innovate, lead, and go beyond the status quo.”

Some responses to Brewster’s posts show traders grappling with losses in the value of their holdings, while others have highlighted that even teenagers seem to be dabbling in the app.

“They’re not super finance-savvy,” Brewster said of Kearns’s family in a phone interview this week. “I don’t even know that they would have known the questions to ask.”

Robinhood’s popularity reflects one aspect of modern investing culture, said Alex Caswell, a wealth planner at RHS Financial. It fits into a community that includes everything from Reddit’s Wall Street Bets forum “where everything is seen as one big casino” to FinTwit (financial Twitter), and Barstool Sports’s Dave Portnoy livestreaming his day trading to millions of fans.

“There is a culture that has been built around Robinhood,” Caswell said. “That culture doesn’t necessarily just come from the fact that Robinhood exists, rather Robinhood makes that culture easier to exist.”

Read the full article here by Annie Massa, Sophie Alexander, Advisor Perspectives


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