Some Thoughts of This Robinhood Design Issue

There was a time in my previous job that I had to take some system safety course.

A system safety course are courses where the participants learn how to design systems that are sound, putting safety as a priority.

System safety courses are dry shit. A lot of us don’t like it. Software safety are even worse. You learn ways to code software that puts safety as a priority.

I do not like to look at codes. As a support engineer, I was glad that most of what I had to do are look at codes and not code them.

Despite how much of a chore it was, deep down we know if we fxxk things up, its not just about losing our jobs.

In the system safety course, we were told of how an actual aircraft crashed.

The pilots observed that parts of the software system controlling the plans were abnormal.

Their training taught them that in the event of such issue, go through a list of steps to remedy the situation. If those remedy fails to fix the problem, reboot the system.

So one of the pilot rebooted the system.

The problem was… there was a glitch in the software pathway. When the system rebooted, the software checks a few conditions before they proceed to the next phase of the software.

If those system conditions are not met, the natural system result is to…. reboot the system.

When the system rebooted, the system conditions were in such a mode that it will not allow the system to proceed, so the flight system kept rebooting…. and rebooting… and rebooting…. until the whole plane crashed to the ground.

This case study seared into my brain that you can design very nice systems by following the best practices out there. But when it comes to systems that are safety-focused, those best practices could be rather dangerous.

How Safety Critical Should a Finance App Be?

I am sure you must have came across the story of Alexander Kearns.

Alexander Kearns threw himself in front of a train. Kearns left a note which indicates that he was distraught and confused over his Robinhood account.

Kearns, 20, was using the very popular app Robinhood to trade options.

When he saw that his balance was -$730,000, he lost it.

When I saw the headline, I thought it was one of those kids who punted on some of those near-bankrupt stocks like Hertz and go very wrong.

It was nothing like that.

Kearns’ cousin-in-law Bill Brewster originally thought that Robinhood had improperly granted Kearns vast amounts of leverage to trade with.

When Bill tweeted this out on Twitter, some twitter users alerted him that options traders on Robinhood sometimes see a negative cash balance until the other half of their trades are executed.

Now most believed Kearns died over nothing.

“My sense is that it was all over nothing. It was a user interface issue,” said Brewster.

Robinhood since then has acknowledged the problem and announced changes:

1. Roll out interface improvements on how the buying power is displayed
2. Make improvements to its in-app messages and emails that get sent to customers about options transactions
3. Changes to the in-app history page to help users “understand the mechanics” of options trades
4. “Considering” additional criteria and education for customers that seek authorization to trade sophisticated options to help them understand how they work

Bill Brewster Asks Some Hard Questions of Robinhood

Alexander Kearns story got so viral, in part because of his cousin-in-law.

When I came across the story, I did not pay attention to the cousin-in-law.

However, I had listened to a podcast his cousin-in-law was on.

The Acquirers Podcast is a podcast by Tobias Carlisle. On the show, he interviews many investors and if you subscribe to the podcast, you will be able to catch certain nuances of individual stock investing, particularly the traditional value investing approach or portfolio management from many of the episodes.

What I really dig about the podcast was a weekly segment called Value: After Hours. Tobias is usually joined by Jake Taylor, CEO at Farnam Street Investments, an independent firm managing $17 million in individual accounts as well as Bill Brewster, who runs family firm Sullimar Capital Group.

Through their interactions, listening to why they decide to purchase, discard certain holdings, and their opinions on various aspects of fundamental investing, you can grow overtime.

The latest episode of Value: After Hours was very weird for me because I was enjoying the light-hearted interactions between Tobias, Jake, and Bill.

Suddenly (you can listen to the episode here), Bill decided to warn us that if we do not want to be bothered by some “personal family drama”, we should tune out that at that point (start at 42 min of the podcast).

I did not get the relation until the point when you hear a grown man starts weeping while reading through the letter.

It was such a hard part to listen to.

This is especially so when for the first 42 mins of the show, you did not detect any sadness coming from him!

That was when I realize HE was the cousin-in-law.

Through his half weeping commentary, Bill raised some notable comments:

1. “I see an ad saying how Robinhood’s app has gamify investing. How the founders are proud of their design features.”
2. “How about you design an internal settlement figure into the background function rather than the home screen. Even an experienced trader referred to that as an alarming sight.”
3. “In what world is it OK to show your users a negative balance of -$730,000 when you know a lot of your money is retail money?”
4. “Why is it that kids are able to get that notional exposure at all?”
5. “What is it about your product that made my (Bill) story go so viral?

“You name your company Robinhood obviously to draw some images of wanting to help the less fortunate. You allegedly gamify investing and democratize trading. That is not good for society and it is toxic. You claim to enable people by granting access but you really make money incentivizing orders so hedge funds can front-run clients. That attitude gives finance a black eye and it is the type of stuff that gives Elizabeth Warren a leg to stand on.

Some Finance Stuff Stayed Complex No Matter How You Dumb it Down

I think that whether you have a new age platform like Robinhood or a traditional account with Fidelity, Charles Schwab, or Interactive brokers, you cannot stop human’s animal instinct to gamble.

During this period, if you give people support checks in their mailbox, a lot of time, and a volatile stock market, you can expect the animal instinct to come out.

But there is something very unassuring about these new peer-to-peer lending, roboadvisers platform that the old birds might find it hard to get used to.

They abstract many of the complexities and make things so much streamlined, so much easier.

In a lot of aspects, it is good. Youngsters and old birds alike have an aversion to complexities. Finance has a lot of complexities (sometimes the industry deliberately made it that way to enable them to charge more) and this turns off people of all age groups from investing.

Simplifying things gets more people that wish to invest but find it hard to start investing.

But fxxk. For some things, it make sense to be hard.

Can you imagine a 20 year old university student trading futures and upon expiry, they didn’t know they need to take delivery of a few barrel of oil?

Going back to my flight system example, while the systems can fly a plane on their own, the pilots are trained to understand the system as well as fly the plane if the system breaks down.

There is a barrier to becoming a pilot for good reasons because the plane cost a lot of money, there are a lot of lives at stake. There are risks involved.

Options is a form of derivative and margin is borrowing money.

If you do not know them well enough, they can blow up in your face. Even if you are an experienced trader, they will still blow up in your face because they interact with markets.

While most of the time markets can be very predictable… we know very well this year that markets can switch rapidly. You may have a great trading algorithm that you have extensively backtested. Yet, the unpredictable nature of the markets may create a situation your algorithm is not build to handle.

There should be enough oversight in certain areas of finance that is complex enough that people who do not wish to get educated or lack the necessary competency.

Products Evolve for the Better Over Time But We Should Prioritize Certain Aspects of Products Above All Deliverables.

The decision on systems and product design lead to this unfortunate incident.

These decisions sometimes is not a simple thing.

At my work in Providend, my first draft of the tool to the advisers or the clients (some of you might have seen my handy work) always looked overloaded with stuff.

It took many iteration of internal deliberations on whether

1. We want to show this to the clients
2. Can we show more of this to the clients
3. I think it is better to present this data in this kind of chart
4. Will they get the wrong impression about things if we show them this

Going back to the drawing board is damn frustrating. Sometimes you get hot inside because you put in enough thinking and its back to the drawing board. Maturity is when you realize that if you put out something slip shot, the whole firm gets more problems because you create more misunderstanding with the clients or the adviser.

Given all this, all the materials in the financial planning process often are an iterative process. There will always be things you missed out and bugs here and there. We get a version that is deliverable and keep iterating.

It is just the way it is. We are not perfect.

As a company, you can put priority to certain aspects of the business. If I remember correctly, in the book Good to Great, a CEO turned around his company by elevating the emphasis of safety in his company.

Why that worked out is because to be a very safe company, it requires everyone to be conscientious, accountable, and communicate well.

I do not think a trading app is classified as safety critical. However, I think poor design, leads to poor communication, leads to misunderstanding, and a whole lot of other problems.

But sometimes you got to wonder the motivations of these startups.

They got this grow at all costs, hacking mindset that they would just close an eye to some stuff.

And it might lead to incidents more incidents like this.

I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.

To find out more visit Interactive Brokers today.

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