US trader aspiring trader commits suicide over Robinhood losses
20-year-old American was able to get almost $ 1,000,000 of leverage.
On a little yellow note that a 20 year old Alex Kearns left on the door of his bedroom, there was a request to turn on his computer.
Daniel Kearns turned on his son’s laptop at their home in Naperville, Illinois. After a few seconds, a message flashed on the screen. «If you’re reading this then I’m dead», – it said.
Less than 24 hours have passed since Alex verified his account on the popular trading app Robinhood. In his memo, he wrote that he believed he quickly accumulated a negative account balance of $ 730,165. But Alex may have misunderstood Robinhood’s financial statement.
Alex’s body was found Friday, CNBC reported. John Stratton, chief of fire department in Plainfield, Illinois. Alex, a sophomore at the University of Nebraska at Lincoln, studied management and, according to his family, has shown a growing interest in financial markets..
The trading app he used became a popular entry point into the stock market for aspiring investors. The service has grown from 1 million users in 2016 to 10 million earlier this year. On one of the Reddit forums, Wall Street Bets, traders often joke about large losses in Robinhood and post screenshots of their profits.
Suicide is the result of many contributing factors, not the result of a single event. However, the tragedy is a reminder of the risks and the potential for large losses that can accompany the use of complex trading instruments such as options..
«How a 20-year-old with no income was able to get almost a million dollars in leverage?» – says the note.
In a statement to CNBC, a Robinhood spokesperson said they «deeply saddened to hear this terrible news and sent condolences to the family». A spokesman confirmed that Kearns had an account, but did not provide any further details..
The FINRA regulator requires Robinhood to approve each individual client who wishes to trade options. The same is required of any regulated brokerage firm. In the case of Robinhood, traders fill out an in-app questionnaire that certifies the trader’s investment experience and level of professionalism, as well as risk recognition. Robinhood does not support selling an uncovered option.
An option contract gives the trader the right – but not the obligation – to buy or sell an asset at a specific price, on a specific date, or earlier. Traders use it to hedge risks or speculate.
A matching transaction to cover a purchase is often not completed until the next trading day, which Robinhood informs its users of via email and notifications. In this case, cash and purchasing power will turn negative until the other party processes the transaction. The temporary negative display is not a debt balance and the total portfolio value will reflect the account value.
A screenshot from Kearns’ mobile phone shows that while his account had a negative balance of $ 730,165 displayed in red, it may not have represented unsecured debt at all, but rather had a temporary balance as long as the underlying stock of his assigned options did not actually appear in his account.
It is impossible to know all the factors contributing to suicide, especially among young people. However, the tragic death of Alexander Kearns is a cautionary tale about the serious risks associated with the brokerage business. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive Brokers, Fidelity, and even Merrill Lynch all offer commission-free and zero-balance trading in an effort to attract younger clients, many of whom are poorly versed in securities and markets.