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Robinhood is in hot water again, but this time it’s because of someone else’s cash crunch.
The digital exchange furiously backpedaled on Thursday on its decision to refuse traders to cash out their short bets against bankrupt Signature Bank, after realizing it would have to honor options contracts sold on its platform despite being banned rather hazy of short selling.
This isn’t the first time Robinhood has acted like a bully despite its claim to “democratize finance”. In January 2021, when a Reddit-fueled frenzy overloaded stock values with memes, Robinhood – facing a sudden liquidity crunch – blocked users from buying shares in companies such as Gamestop and AMC.
This time, Robinhood got caught up in short selling, which is betting that a company’s stock will fall in value, and profiting from the difference. When shares of crypto-exposed Signature began to plunge as the inexorable domino that was Silicon Valley Bank rushed towards it, some savvy users bought put options. After New York state regulators shut down Signature, Robinhood’s knee-jerk reaction was to tell users they couldn’t exercise their options contracts, which were set to expire on Friday.
The customer uproar and subsequent public reaction seem to have forced Robinhood to turn around:
- Robin Hood said THE FinancialTimes it would be ready to go to the market to buy back shares so that it could honor its contracts with users. Finding stocks for a bank that’s already dead in the water could be tricky, so Robinhood may need to get creative.
- Users are sitting on some pretty big wins predicting Signature’s demise. A Robinhood user, a former bank trader called Shaun William Davies, told the FT his trade of $3,445 should have turned into $25,000. “It’s crazy that you make the right bet but it’s so fair, you can’t get paid,” he said.
Cryptoo-de-lally: Signature’s disintegration isn’t the only crypto-themed headache Robinhood is experiencing. The company announced late last month that it had received a subpoena from the SEC regarding its crypto listings following the FTX seismic implosion. Robinhood allows users to trade crypto tokens including Bitcoin, Ethereum, and the seriously serious Dogecoin. Digital brokers make plans and God laughs…or maybe they don’t make plans and he laughs even harder.