Regulators should take a harder look at Robinhood

The tragic death of Alex Kearns, a Robinhood Financial Inc. customer, who took his life last week after believing he lost some $730,000, is already changing how sophisticated trading strategies are offered online.

Robinhood promised to retool the process customers go through to access options trading and pledged to promote investment education on its website. That’s welcome news for Main Street investors. 

Fintech platforms continue to improve the investment process for the masses, and have opened up complex strategies that were traditionally only available to the very wealthy. The firms offering these products should recognize their inherent dangers and protect customers accordingly. 

“On Saturday, we learned that Alex Kearns, a Robinhood customer, died by suicide and left a note citing confusion with our product,” Robinhood founders Vlad Tenev and Baiju Bhatt wrote in a blog post. “We recognize this profound responsibility, and we don't take it lightly.”

The platform abides by Financial Industry Regulatory Authority Inc. rules and regulations regarding Know-Your-Customer standards, according to a source familiar with Robinhood's internal review process. The personal identifiable information includes employment status, investing experience and net worth, among other criteria, and customers who want to trade options have to pass an eligibility questionnaire, the source said. 

Customers may be required to pass additional criteria in the future or sign up for educational services, according to the post. Still, industry observers — especially Kearns’ family member Bill Brewster — took to social media to ask how a 20-year-old college student was able to access hundreds of thousands of dollars of leverage.

If Robinhood has already made changes to install additional guard rails for investors using these products, should regulators take a deeper look at these online offerings to make sure the appropriate level of guidance is in place?

Regulators can't stop investors from losing money. But, retail traders who are entering the market for the first time with commission-free trades on slick digital platforms — are vulnerable.

Tragically, the $730,000 deficit that showed on the account was likely only temporary and would have been updated when other equities underlying some of his options trades settled, according to an analysis by Bloomberg.

Neither the SEC nor Finra responded to requests for comment.

Let’s be clear: These strategies are not dangerous by themselves, and to its credit, Robinhood has announced it plans swift changes. Improvements to in-app messages and emails sent to customers about their multi-leg options spreads, like the one Kearns was reportedly using, are also in the works at Robinhood. Changes to the way the buying power is displayed are being suggested — a simple fix that could have gone a long way.

While Robinhood rightfully acted to remediate the concerns, it's ultimately not only up to private platform providers to set up guard rails that some customers might need. Whether it's the firms themselves putting in safeguards, or the regulators mandating the requirements, the outcome should ultimately have a similar effect.

While these are thorny issues, the conversation is taking place among investors and will likely give rise to deeper analysis in the coming months and years. Perhaps, regulators are already considering these very questions as we speak.

While Robinhood has taken actionable first steps, new digital platforms may need, or even seek, additional guidance from regulators. The innovation happening on investing platforms should not outrun the pace of new regulation.