Stealing From the Poor: Regulating Robinhood's Exchange-Traded Options for Retails Investors

ABSTRACT

During the height of the COVID-19 pandemic, Robinhood, a brokerage-free stock trading app, saw a meteoric rise in account holders, with Americans seeking new income streams during times of economic hardship, unemployment, and, at times, sheer boredom.1 The ensuing trading activity significantly impacted the country's stock market-a result of not only Robinhood's three million new accounts2 but also their investment in complex financial instruments known as exchange-traded options.3 Notably, several stocks experienced seemingly illogical price and trading volume increases, leading to unsustainable price bubbles, dramatic increases in price volatility, and eventually crashes.4 Robinhood's options trading platform was the primary vehicle for this trading activity,5 allowing investors to trade beyond their financial means, or perhaps more aptly, gamble on future prices. The trading activity highlighted two significant problems with allowing retail investors to invest in exchangetraded options their failure to fundamentally comprehend the financial instrument and, consequently, their significant losses. Numerous regulatory responses may address these problems, each focusing on a potential contributing level (1) retail investors;(2) the exchange-traded option;and (3) Robinhood. This Note aims to analyze five potential responses, ranging from least interventionist to most increasing mandatory disclosure requirements, product regulation, conduct regulation of Robinhood as a broker-dealer, conduct regulation of Robinhood as a trading platform, and restriction of access to the product by retail investors. While each of these options has its inherent benefits and costs, this Note ultimately advocates that the appropriate response to curb Robinhood options trading by retail investors is to regulate Robinhood's conduct as a trading platform by establishing affirmative duties on it that seek to protect its retail customer base, particularly in light of the nature and structure of its execution of trades orders from clients.