More than two years after Robinhood, one of the most popular trading service providers for retail clients, banned 'meme stocks' trading in the midst of a speculative frenzy, the company has once again found itself under retail investors' criticism. This time, traders are complaining about the alleged inability to realize profits from their bets placed against the collapsed Silicon Valley Bank (SVB) and Signature Bank (SB).
Robinhood Users Cannot Cash Out Their Bets Against SVB
The controversy centers around put options, which allow investors to bet on the decline of a share's value. If the share value falls, the investor can sell it at a higher price than the current market value, thereby earning a profit. Another option is to sell the contract back to another market participant who believes that the price may fall further.
Some of Robinhood's clients purchased put options just before SVB and SB collapsed last week, and correctly predicted the market's future. However, they are allegedly facing issues with collecting their due profits. According to their complaints, Robinhood is not allowing them to sell their contracts or receive payment. As many of these put options on the shares of the collapsed banks are set to expire this Friday, this is causing growing frustration among affected customers.
Keith is this legal from Robinhood? I have a put against SBNY and they are saying it will expire worthless. Apparently many others are experiencing the same. pic.twitter.com/rM43LdKgAg
— SlapCityFightPicks (@slapcitymmabets) March 15, 2023
The issue is that the shares are no longer being traded, making it difficult to purchase the shares required to fulfill the contract if the user does not already own them. Furthermore, given that the affected stocks are already experiencing significant losses, few people are interested in purchasing these contracts, as there is limited potential for further gains. As a result, the situation has become a logistical challenge for Robinhood and a frustrating predicament for its users.
Problem is that Robinhood says if I own shares the put can hangout on my account or I can force exercise it, but since I don’t own shares my put will “disappear” at expiry instead of hanging out on my account until the freeze is lifted or the OCC makes another determination.
— JohnnyDubs44 (@JohnnyDubs44) March 15, 2023
Robinhood's CEO Vlad Tenev addressed the issue after Forbes' report. He wrote on Twitter that the company is currently working to resolve the issue as soon as possible.
We’re working to resolve this ASAP … stay tuned
— VLAD (@vladtenev) March 15, 2023
As it turns out, Robinhood is not the only company facing this problem. Retail options traders report that they cannot exercise their options with broker Fidelity either.
Currently talking to securities lawyers on why Fidelity won't allow me to exercise my $SBNY PUT contracts seeing as the bank has been seized the stock should be well below the $50 strike.
— Spence ☕️ (@tspencer322) March 14, 2023
Updates to follow. #SBNYPUT
Experts explain that it is difficult to require the exercise of options on shares that traders do not own. However, traders may ask why they were able to purchase these options in the first place if owning the shares was a prerequisite for their exercise in a situation such as the one described above.
Users of Robinhood Remember GameStop Saga
The Robinhood platform was created as a place to democratize trading and give retail investors access to the market with the same market terms as institutional and corporate players. This has largely succeeded, as traditional brokerages have had to adjust their offerings due to increasing competition and forget about high transaction fees in favor of commission-free trading.
Robinhood experienced a real boom in popularity during the pandemic when people locked in their homes often threw themselves into the capital markets out of boredom. This triggered the previously unknown phenomenon of the 'memefication' of trading and the emergence of 'meme stocks'.
One of the most popular examples of this period was the astronomical rise of Game Stop stocks, aggressively shorted by hedge funds. As retail investors banded together to play against the big players, with more joining their ranks daily, Robinhood took the controversial decision to block trading in these stocks on its app. IG Group, Charles Schwab and TD Ameritrade also decided on a similar move, but Robinhood being the most media-savvy, received the most criticism.
GameStop's stock situation explained: Robinhood, short squeezes, and Reddit: https://t.co/7uOI4OZlIt pic.twitter.com/1UywzP0Klp
— GameSpot (@GameSpot) January 29, 2021
Over time, the company, almost like a centrally controlled economy, allowed users to purchase a maximum predetermined number of shares.
Eventually, trading activity returned to normal, but many traders were cut off from profits. Two years after, the situation may repeat once again.
