if you had “Robinhood controversy” on your bingo card for the banking crisis of 2023 you are lucky. The square has just been called. Unlike the big meme stock rally of 2021, this brouhaha is all about put options and how broker app users are unable to monetize the collapse of Silicon Valley Bank and Signature Bank, even if their bets are in be the money.
Put options are a way for investors to bet that the price of a stock will fall. If the stock does fall, the trader can sell the stock at a price higher than market value and make a profit. Or they can 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 getting to enjoy 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 stock before it collapsed. Of course the banks collapsed. It should have been a stroke of luck for those who saw trouble emerging.
The problem, according to users of the trading app, is that Robinhood does not allow them to sell their contracts or get paid. A large number of contracts expire on Friday. That has angered 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 trading, so it’s a bit of a logistical nightmare to buy the shares if you don’t already own them to fulfill the contract. There aren’t many people willing to buy the contracts at this point as the stocks are already on the operating table and there aren’t many if any downsides left to take advantage of.
Robinhood isn’t the only exchange that is failing, according to retail options traders. Fidelity, which did not immediately respond to requests for comment, also took a beating on social media for not paying. Unsurprisingly, given its history, Robinhood seems to be the punching bag of choice.
That doesn’t stop users from asking 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 getting paid if such a situation arose?
Robinhood mobile trading app is designed to democratize finance, to bring power from the markets to the people, to disrupt Wall Street’s old boys’ club. But as the great meme stock rally of 2021 erupted, Robinhood found itself frozen, like a scared puppy, as soaring demand for GameStop and other meme stocks threatened to overwhelm the platform’s infrastructure. The company’s wallet, it turned out, wasn’t deep enough to accommodate the rapid increase in transactions, leaving Robinhood responsible 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 years-long investigation by the House Financial Services Committee that concluded the app was closer to flatlining than was claimed at the time.
Much like the meme stock episode, this week’s simmering put options scandal shows that even the best bets can become worthless.
There is something ironic about the situation. In 2021, WallStreetBets users complained that Gabe Plotkin’s Melvin Capital, among others, had naked short positions against GameStop – meaning they didn’t own any GameStop stock to back up their bets against the stock. Now 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 too much on the nose.
While Twitter is swindling with complaints from Robinhood users, well-known short-seller Marc Cohodes offers a bit of advice: Call a lawyer. He also promises that there will be “hell to pay” if Robinhood or any other broker wants to “fuck Joe Six-Pack”. Stay tuned.
Leave a Reply