Robinhood Beats Hasty Retreat After Blocking Signature Bank Shorts

Photo credit: Ken Teegardin/Flickr

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Robinhood is in hot water again, but this time it’s because of someone else’s liquidity crisis.

The digital exchange backpedaled furiously Thursday on its decision to refuse traders cashing out their short bets against failed Signature Bank, after realizing that it would have to honor options contracts sold on its platform despite its rather hazy ban on short selling.

This? Again?

This is not the first time Robinhood has acted like a despot despite its claim to be “democratizing finance.” In January 2021, when a Reddit-fuelled frenzy super-charged the value of meme stocks, Robinhood — facing a sudden liquidity crisis — stopped users from buying stock in companies including Gamestop and AMC.

This time Robinhood was caught out by short selling, i.e. betting that a company’s shares will decrease in value, and profiting off the difference. When crypto-exposed Signature’s stock started to plunge as the inexorable domino that was Silicon Valley Bank hurtled towards it, some canny users bought put options. After Signature was shuttered by New York State regulators, Robinhood’s knee-jerk reaction was to tell users that they couldn’t exercise their options contracts, which were set to expire on Friday.

The customer uproar and public backlash that followed seem to have forced Robinhood into a U-turn:

  • Robinhood told the Financial Times it would be willing to go to market to buy up shares so it can honor its contracts with users. Finding shares for a bank that’s already dead in the water could be tricky, so Robinhood might have to get creative.
  • Users are sitting on some pretty hefty gains from foretelling Signature’s demise. One Robinhood user, a former bank trader called Shaun William Davies, told the FT his $3,445 trade should have turned into $25,000. “It’s crazy that you make the right bet but that it’s so right, 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 at the end of last month it had received an investigative subpoena from the SEC over its crypto listings following the seismic implosion of FTX. Robinhood allows users to trade crypto tokens including Bitcoin, Ethereum, and the super-serious Dogecoin. Digital brokers make plans and God laughs… or maybe they don’t make plans, and he laughs even harder.