Retail trading platform Robinhood (NASDAQ:HOOD) is back in the firing line for failing to honour trades, this time in relation to options placed on collapsed US lender Signature Bank.
Accusations being shared over Twitter suggest Robinhood is not allowing traders to cash in their profitable puts against the bank, which folded last week amid an ongoing crisis in the banking sector.
The situation bears resemblance to the 2021 meme stock frenzy, when activist traders used Robinhood to pump the price of Gamestop and AMC shares to force liquidations of short-selling investment firms.
In that instance, Robinhood temporarily prevented users from trading the targeted company shares, resulting in massive political outrage.
“We’re working to resolve this ASAP… stay tuned,” said co-founder Vlad Tenev in response to a lawyer threatening legal action for the latest discrepancy.
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 question of whether Robinhood should honour the trades is confusing, since there does not seem to be clarity on whether the writer or holder of the option should bear the risk if a company’s shares get halted on the stock market.
It seems clear that in the instance of a full delisting, Robinhood would be forced to cough up. But Signature Bank is only halted, not delisted.
There are options due on Friday March 17, and options holders may face losing everything unless a) trading resumes or b) Robinhood allows puts to be exercised.
The best case scenario would be for Nasdaq and the Depository Trust Company to determine that stocks are delisted, but for now, options trades expiring on Friday appear in limbo.
IMO option writers (not holders) should bear most (or all) of the risk that underlying securities will be delisted such that worthless shares cannot be obtained and delivered when exercised. The OCC should fix cash prices (above 50% of strike price) payable upon exercise of puts.— Andrew Friedman (@AfriedmanAndrew) March 15, 2023
Robinhood, as the writer of the option, would have been obliged to buy the shares at a massive premium if Signature Bank was still trading or delisted…but it is neither. Trading is only halted.
Robinhood’s line of reasoning appears to be: We can’t buy your shares back, because you don’t technically have any to sell. Sorry about your Friday expiry date.
Various Twitter users have said similar, with one stating: “There is no legal basis to sue Robinhood… To close a put you either sell the put to someone who will buy it (in this case no one) or you exercise (purchase shares and sell shares at strike). You can’t buy nonexistent shares.”
But is this fair?
At face value, Robinhood’s stance to not honour the puts makes sense; if the holder of an option doesn’t have any shares to sell, how Robinhood buy them?
Investing carries risk and there’s little point in complaining if you get burnt.
However, literature published by Robinhood states: “The option writer (in this case, Robinhood) is obligated – if and when assigned an exercise – to perform according to the terms of the option.”
But the wording is not overly clear regarding what happens in the event of a trading halt: “If a restriction on exercise is imposed at a time when trading in the option has also been halted, holders of that option will be locked into their positions until either the exercise restriction or the trading halt has been lifted.”
So the questions remain: What obligation does Robinhood have to honour these puts? Will Robinhood delay the expiration date?
It’s hard to get a straight answer.
Clearinghouse The Options Clearing Corporation has stated that “all exercise and assignment activity for SBNY options beginning March 13, 2023 will be subject to broker-to-broker settlement”.
the OCC has determined not to impose any exercise restrictions with respect to Signature Bank options, suggesting that it will facilitate settlements.
According to The Options Industry Council: “If upon exercise and assignment of the option, the party obligated to deliver the underlying security does not already own the shares, it may be difficult to obtain the shares to deliver.”
Still not terribly helpful.
A website has emerged, compiling unverified screenshots from options traders trying to get clarity on their options due for expiry on Friday. Proactive has asked Robinhood to verify the screenshots.
The bottom line appears to be: Options traders bet against Signature Bank, but when it came time to exercise, they couldn’t get hold of the shares because of the trading suspension.
Options due for expiry on Friday are thus at risk of being closed without realising any of the profits, unless expiry dates get extended.
Quite the headscratcher.