The Dangers of Retail Trading

May 14, 2021

In mid-2020, a young investor named Alex Kearns took his life. The reason for his suicide was that he believed he lost over $700,000 while trading stocks. Alex Kearns was only 20 years old.

How did Alex lose his money?

Alex was always passionate about his future, and as a sophomore at the University of Nebraska, he started learning about trading stocks. At the time, he was studying management, and trading fascinated him. He started trading on the American trading app Robinhood. His family did not know much about retail trading but figured since Alex was using his own money, his new hobby was harmless.
 
Alex was very keen to grow and diversify his portfolio and soon started trading high-risk instruments like options. Options are financial derivatives that allow buyers the right to either buy or sell an underlying asset on a pre-agreed date and price.
 
Options are risky because they seem cheaper than other financial instruments but tend to lose value much faster. Alex had $16,000 in his account but received a notification that he had lost $730,000. This alert scared Alex and sent him into panic mode. He instantly started sending emails to Robinhood since he believed his losses were capped at $10,000.
 
Alex received a series of automated emails just after 3 a.m., stating that he had 5 days to deposit the first instalment of $170,000 to settle the trade. The panicked young investor waited until Wall Street opened at 9:30 a.m., but Robinhood never replied to his email. Alex then proceeded to leave a short suicide note on his computer and a few hours later threw himself in front of an oncoming cargo train.
 
“If you’re reading this then I am dead. See the image ‘Suicide 2’ for why.” Alex explained that he never opted to trade on such high leverage and was devastated about the pain he would cause his family, “Please understand that this decision was not made lightly. You could fill an ocean with the amount of tears I’ve shed typing this. Please, please take care of yourselves. The amount of my guilt I feel as I commit to this is unbearable—I did not want to die.”

Negligence that led to a wrongful death 

The same day that Alex died, Robinhood sent an automated message saying that the trade had been resolved and he did not actually lose all that money. The message read, “Great news! We’re reaching out to confirm that you’ve met your margin call and we’ve lifted your trade restrictions. If you have any questions about your margin call, please feel free to reach out. We’re happy to help!”
 
After Alex’s death, his parents proceeded to sue Robinhood for negligence. Firstly, an investor that young and inexperienced should have never been allowed to trade risky instruments like options, especially with such high leverage. Secondly, Robinhood’s lack of customer support meant Alex had no means to communicate with a representative that could have explained that he never actually lost all that money. The lawsuit that his parents filed accuses Robinhood of “misleading communications that lead to panic and confusion.” In addition to this, Robinhood was accused of “unfair business practices and negligent infliction of emotional distress.”
 
“He was in a complete panic. His panic and desperation grew as he was unable to communicate over a number of hours with anyone at Robinhood,” said the lawyers representing Alex’s case.

Is Robinhood’s marketing the problem?

In a statement on Alex’s death, Robinhood said that they were “devastated by this tragedy.” The company added that it is working on “identifying how we can improve Robinhood’s customer experience, specifically around our option flows involving multi-leg exercise and assignment.”
 
Critics accused Robinhood of using reckless marketing tactics that enticed young investors to sign up. “You don’t need to become an investor,” said Robinhood’s ad, “You were born one. Robinhood.”
 
Young investors may be unaware of how dangerous retail trading is. It is the responsibility of the platform they use to protect them from volatility and high leverage.