Robinhood backs down over Signature Bank bets
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Robinhood has caved in to irate customers sitting on a windfall from betting on a fall in Signature Bank shares, after the online broker had threatened to let their lucrative positions expire without a payout.
The investors had bought short-dated options on the Robinhood site that stood to net them big gains if the share price of Signature fell before the contracts expired.
Until its U-turn, the broker had told its customers that the suspension of the bank’s shares after its collapse, coupled with its own bar on short selling, meant many contracts could not be honoured and would expire worthless on Friday. But in an email on Thursday morning, Robinhood offered to let customers exercise their options. *
Retail traders trained their sights on New York-based Signature last week as uncertainty over the future of Silicon Valley Bank rose and another bank, Silvergate Capital, put itself into voluntary liquidation. US regulators stepped in to take over Signature on Sunday and its shares were suspended from trading on stock exchanges from Monday.
Many investors bought monthly “put” options on Signature, which gave them the right but no obligation, to sell shares by a set date in the future. The contracts mean purchasers can profit handsomely if the share price falls sharply. In the week before its suspension, Signature’s shares fell by more than a third.
On Thursday Robinhood told clients holding profitable or “in-the-money” positions on Signature that it would make an exception to its rules and allow investors to exercise their options position for Friday’s expiry date.
The broker had previously said it would only honour the trade if customers already owned the shares in their account and had used the put option as insurance against potential losses. The broker does not normally allow short selling on its site.
In relenting, it said it would be prepared to go into the market to find shares, which would allow customers to exercise the contract.
Robinhood’s shift brings it roughly into line with several other brokers including Interactive Brokers and Fidelity who were already allowing clients to keep their positions open past the expiry date, as long as investors paid to cover their short position until Signature Bank shares begin trading again or is resolved in some way. The main US options clearing house has said it would process deals that are settled privately between brokers.
Robinhood did not respond immediately to a request for comment on its change of stance.
Signature’s big fall on Friday ahead of its collapse left those with puts sitting on potentially big gains.
Shaun William Davies, a former bank trader now teaching derivatives to MBA students in Colorado, said his trade with Robinhood cost $3,445 and should have netted him $25,000. He said the broker had not made it clear ahead of or during the trade, that his put would be considered a short position if the underlying shares were halted.
“Its crazy that you make the right bet but that it’s so right, you can’t get paid,” he said. “I take no joy in the fact that these options are deep-in-the-money as it means real people were impacted [by the collapse]. I was just trying to hedge, to some degree, my retirement portfolio.”
Renowned short seller Marc Cohodes had taken up the Signature Bank options holders’ cause on Twitter.
“Everyone with a valid put option should be able to get paid out on settlement date,” he told the Financial Times on Wednesday before Robinhood reversed course. Cohodes is short Signature Bank stock, but has no options position in it.
This article has been amended since publication to reflect the trading process involved with exercising options contracts