02/09/2021 — A Sticky Wicket

News broke today that the family of Alexander Kearns has sued Robinhood for the death of their son, a former day trader. This not the first time they have been sued, and it is unlikely to be their last. Just the other day, in the wake of GameStopGate, another client filed a class action suit against the online brokerage firm claiming that they abandoned their customers…or something to that effect.

Both suits stand to garner significant national attention, at least in the financial world. Both plaintiffs share some of the same general complaints, but I believe that the wrongful death suit exposes deeper, more important issues that need to be addressed. The other legal challenge can stand to wait for another day.

Robinhood billed itself as the ultimate in discount brokerage, and staked that claim on a platform that offered truly commission free trading. That’s a discount with a capital D. Many proponents of the company have hailed their format as “the democratization of trading.”

Yes, it allows more people to participate, but free as it may be on the surface, there exist serious hidden costs embedded within the fine print. Let’s assume for a moment, that the creators of the app set out to help new traders and make a profit at the same time. If they aren’t earning revenue from their day traders, surely they must be capturing it somewhere. It’s possible they prioritize a system of routing orders that involves payment for order flow (I won’t discuss the details of that here). Perhaps they carry only the bare minimum in insurance for their held accounts in case of black swan type events. It’s a good way to cut costs — maybe. Or, as was the case when Mr. Kearns was trading, they didn’t provide customer support lines to resolve issues and help customers in a timely fashion.

This last point should stand apart from the others. Regardless of the business implications of cutting corners by means of the first two methods, most people, both within and outside of the industry would agree that in such a high risk environment, a core part of the product should be customer support.

Should bare-bones offerings like Robinhood exist? Should I be able to buy a car that my neighbor built and wants to sell to me? Should I be allowed to drive it? What if he’s a certified mechanic and builds cars for Ford Motor Company during the day — does that change it? Why must restaurants and grocery stores jump through so many hoops to sell me their products when farmers markets appear to have such less oversight? If I’m in pain, why are some painkillers readily available to me while others need my doctor’s approval, even if he’s getting kickbacks for prescriptions written?

Most importantly, why hasn’t society volleyed these types of questions as they pertain to modern online brokerage? What was once a hyper-restricted arena given access to only a very small slice of the public has transformed into an activity, dare I say a hobby, given as much oversight as backyard gardening.

This soliloquy makes no attempt to answer these questions, and finding hard and fast, black and white answers is unlikely. But the discussion needs to take place. Whatever happens legally is secondary to the tragedy that set the wheels in motion. Hopefully there can be a balance struck between full-access, “democratic” trading and the need for a few safety measures even if they impose some sensible restrictions. We debate these competing viewpoints in nearly every other industry. It might be time to reexamine the world of online trading.

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