- A 20-year-old trader who said he lost hundreds of thousands of dollars on the free trading app took his own life, according to his family.
- In a note, Alex Kearns blamed Robinhood for allowing him to take on the risk.
- But Alex may have misunderstood the Robinhood financial statement, according to a relative.
- The events underscore the risk that comes with complicated financial instruments like options trading.
VIDEO2:1402:14Twenty-year-old commits suicide after seeing big losses on RobinhoodFast Money
On the small yellow sticky note that 20-year-old Alex Kearns left on his bedroom door was an ominous message saying to turn on the computer.
Daniel Kearns powered up his son's laptop in their home in Naperville, Ilinois. Within seconds, a four-paragraph letter flashed on the screen. "If you're reading this, then I am dead," the note started.
It was less than 24 hours after Alex had checked his account at the wildly popular trading app, Robinhood. In his note, he said he thought he had quickly racked up a negative $730,165 cash balance. But Alex may have misunderstood the Robinhood financial statement, according to a relative.
"He thought he was exposed, he thought that ending his life would protect his family from the exposure," Bill Brewster, a cousin by marriage and an analyst at Sullimar Capital, told CNBC in a phone interview. "He got on his bike and never came home."
Alex's body was found on Friday, Plainfield Illinois Fire Department Chief, Jon Stratton, told CNBC. Alex, a sophomore at University of Nebraska at Lincoln, was studying management and had a growing interest in financial markets, according to his family.
VIDEO2:4402:44Leon Cooperman: Robinhood traders speculation will 'end in tears'Halftime Report
The free-trading app he was using has become a popular entry point to the stock market for first-time investors. It has grown from 1 million users in 2016, to 10 million at the start of this year, with a loyal following on social media. On one Reddit forum, Wall Street Bets, traders often joke about major losses on Robinhood and post screenshots of their gains.
Suicide is the result of multiple contributing factors, and not the result of a single event. Still, the tragedy is a reminder of risks, and potential for big losses, that can come with complicated trading instruments such as options. Over the weekend, Brewster took to social media to find answers and in the process warned others about the pitfalls of day trading.
"This is investing, this isn't a game. It's people's lives," Brewster said.
In the note to his family seen by CNBC, Alex accused Robinhood of allowing him to pile on too much risk. He claimed the puts he bought, and the shares sold "should have cancelled out" but in hindsight, he said he had "no clue" what he was doing.
"How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?" the note reads. "There was no intention to be assigned this much and take this much risk, and I only thought that I was risking the money that I actually owned."
In a statement to CNBC, a spokesperson for Robinhood said they "are deeply saddened to hear this terrible news and we reached out to share our condolences with the family." The spokesperson confirmed that Kearns did have an account with the brokerage start-up but would not provide any additional details.
Robinhood is also reviewing its options offering "to determine if any changes may be appropriate," according to the spokesperson.
Alex KearnsSource: Bill Brewster, Kearns family
An options contract gives a trader the right — but not the obligation — to buy or sell an asset at a specific price, on or before a certain date. Traders use it to hedge risk, or speculate.
Robinhood is required by its regulator, FINRA, to approve each individual client that wants to trade options. The same is required of any regulated brokerage firm. In the case of Robinhood, traders fill out a questionnaire on the app that certifies investing experience and level of sophistication of the trader, as well as an acknowledgement of the risk. Robinhood does not support uncovered option selling.
Brewster said Alex may have misinterpreted the state of his Robinhood account. CNBC has not seen details of Kearn's trading account and could not independently confirm the extent of the losses.
A screenshot shared by Brewster shows negative cash and buying power:
But negative buying power and negative cash are not the same as normal debt. The $730,000 amount could have been reflecting the other side of an options trade not settled yet and the value of stocks tied to those options.
A corresponding trade to cover a purchase is often not executed until the following trading day, which Robinhood tells its users via email and notifications. In that case, cash and buying power will come up as negative until the other side has not been processed. The temporary negative display is not a balance of debt and the overall portfolio value would reflect the value of the account.
Daniel Kearns confirmed to CNBC in an email that Alex did have a Robinhood account, and he began trading stocks before this spring. He said the start-up reached out through Brewster, but "he wasn't ready to talk to them." The Kearns family asked that in lieu of flowers, memorials in Alex's name may be made to the American Foundation for Suicide Prevention.
Brewster said he's advocating for more transparency and safeguards for new traders.
"I'd like them to fix the way that they're showing exposure — I want them to act like a financial platform should act," Brewster said. "When you're dealing with retail money and actively soliciting traders under 30 years old to have errors like this is inexcusable and at the minimum negligence."
If you or someone you know is in crisis, call the National Suicide Prevention Lifeline at 800-273-8255
Source: cnbc.com