The family of a 20-year-old United States stock trader who died by suicide sued the broker Robinhood for his death, citing its “misleading communications” that caused their son to panic over what he wrongly believed were huge market losses, according to a lawsuit filed in California Monday. Same thing happened in the Chinese Robinhood, Futu Securities, also known as MooMoo in its APP.
Story started from the famous battle between retail customers derived from a chat room called Wall Street Bets/WSB from a online forum Reddit and notable short-selling wall street hedge funds. Someone entered the market with $50,000, and half a month later made more than $40 million. However, the fortune story is not for everyone. Recently, a screenshot of a client's account that owed Futu Securities (MooMoo) more than US$70,000 (showing negative cash balance) has been circulating online. According to the description, this client owed $75,000 to Futu Securities (MooMoo) after selling AMC's short naked AMC call and losing his position due to liquidation, what’s worse, Futu Securities (MooMoo) failed to close all position before client account goes to negative, resulting in a negative balance of HK$480,000 (US$750K equivalent), meaning, client not only loses everything, but owes US$ 75K to broker.The thing that is unacceptable to the public is that the client said on social media that he was "still in school" and now he's lost so much that "all he got are not enough to pay for it!How on earth could a student successfully open a brokerage account? And a margin account? What did Futu Securities do for the client suitability check? Who should be responsible? Did Futu Securities (MooMoo) fail in its risk control? What did Futu do in the liquidation process? Why did Futu Securities (MooMoo) aggressively promote margin accounts in recent years? What kind of risks are hidden in margin accounts? Are client asset still safe?
What on earth happen?The incident that student who owe $480,000 to Futu Securities (MooMoo), It may result from Futu Securities (MooMoo)’s aggressively margin handling.On Jan. 28, a client but student to be exact of Futu Securities (MooMoo) posted a "cry for help" in Facebook claiming that his positions got liquidated by Futu Securities (MooMoo) due to his AMC calls naked short holdings. After the liquidation, student still owed Futu Securities (MooMoo) around US$ 750KShorting naked call options is generally regarded as a risky action. Once the call option buyer chooses to exercise the options, the seller must sell the stock at the strike price, if it is a naked short combo, the seller has to buy shares in the secondary market to honor his obligation. Theoretically, since the upside movement of a stock price is uncapped, the seller could therefore face an infinite loss.The current point of contention is that whether Futu Securities (Moomoo) takes timely and sufficient action to manage the risk for the customer. It is not commonly seen that a client owe additional to the broker after he has lost everything in his account as normally the brokerage firm will issue a margin call when the margin is insufficient, and the account will start to liquidate when hitting the alerted line. Although it is difficult to say in extreme market condiction, but like AMC, GME case, broker should raise margin requirement for those tickers much earlier before things go badOne of the possible cause of such incident is, Futu Securities (Moomoo) is setting a very low margin requirement for these tickers. It encourage the risk takers to trade more, it increase the total margin loan and potentially result in a high interest rate charged on clients’debit balance, but it is quite irresponsible.
It might be due to such incident, Futu Securities (Moomoo) has suspended the trading of AMC and GMEAggressive Futu Securities(MooMoo) "forcing" users to enable margin accounts?It is Notable that, on the social media, the aforementioned customer revealed that he is still in school. Why students can do naked short? What have Futu did in client suitability check?
(The picture comes from the Internet)In this regard, a brokerage person said that Futu Securities may have risk control loopholes, such as failing to perform prudent due diligence for this customer, failing to do a good job in customer risk rating, and set a reasonable warning line for the risk level of this account , Allowing investors to rush into high-risk areas to trade without corresponding risk tolerance and risk awareness.Some users pointed out on the forum, "Futu Securities are forcing people to use margin accounts for US stocks trading." According to the reporter's inquiry, when clients opening an account on Futu securities, the default form of US stocks account is “Margin Trading and Securities Lending", and there was no other choice.Generally brokerage firms will allow customers to choose account type in account opening, For client who choose to open margin account will require client himself to fulfill additional requirements. The recent market volatility attracts new joiner into the market. Many of them lacks investment experience and have very little personal wealth. Futu Securities this time, obviously has not done sufficient client due diligence and allow someone who should not be allowed entering the market and resulting in customer’s huge loss.Previously, a 20-year-old American young people committed suicide because of owing tons of money by using Robinhood to process leverage trading. Although Robinhood decided to higher the investment standard of option trading, the concern of platform risk controls from the outside world has remained. It has been filed of a lawsuit by Massachusetts Securities Regulation, accused the company of “gamifying” investment and finance. Margin account property can be pledge, clients have fears of losing entire moneyFrom industry insiders ‘perspective, inducing to open securities margin trading account might lead to margin financing chaos.Due to Hongkong securities firms are able to obtain funds by transferring shares held in its customers’ margin accounts to the bank. For instance, Futu Securities claimed in client agreements that according to standing authorization, the company “placing any charge-related property to recognized financial institutions, using as collateral to provide its company’s financial accommodation”.
Once the reported has pointed out, risk points as above, that even though clients has never used margin financing before, there is a possibility that securities companies might pledge shares in the margin account to bank, in order to obtain more loans back to provide large margin trading for high-risk investment clients. However, once securities firms are no longer able to repay bank loads, or gone bankrupt because of self-operated business’s joint and several obligations, bank will have the legal right to sell the collateral and cash out, as for investors, will receive nothing. In the collapse event of C.A. Pacific Securities happened in 1988, due to the fact that small loan business subsidiary subordinate to C.A. Pacific Securitie company has gone bankrupt, in the process of creditor claiming reimbursement, bank sold the shares of customers pledged directly by the same group, C.A. Pacific Securitie, to pay off small load firms’ debts. However, some customers from C.A. Pacific Securitie have claimed that “They were misled to open margin accounts, and as the matter of fact, they have never used margin trading services.”“Binding margin customer properties to non-margin customer properties, its disadvantage is, that clients without financing also bear the risk of financing credit, once securities traders gone bankrupt, they might become debtors.” An experienced Hongkong securities trader further pointed out, when trading is accessing, the clients’ properties are transferred to liquidator, however, during this period, Hongkong securities traders will normally use the form of collective accounts, that is, not doing customer isolations, customers’ properties will be registered under this big account of securities traders. And it might lead to a result that when customer A raises money from securities trader, the thing has been borrowed in fact is the idle money that customer B placed in this collective account. When customer A has wearing situation and no ability to pay off, securities trader bad loans will occur, if the securities trader’s own assets cannot compensate for wearing loss, then properties of customer B will be embezzled to compensate for loss without any notifications.“Just like change the left hand to the right hand.” the people we’ve mentioned above has claimed, “Exploring financing operations by using clients ’properties, then if the situation of large numbers of financing clients loss abilities to pay off has occurred, the benefits of clients who didn’t use margin account will be affected eventually. Under extreme circumstances, once financing clients have trouble paying off, own assets of securities traders will not be able to cover bad loads, mass liquidity crisis will be triggered easily.”They have a further warming, that from prices of crude oil dropped below the standard with one night, share price of Luckin Coffee has decreased 80% sharply because of financial fraud, to GME, AMC event this time, “BlackSwan” incidents seem no longer a small probability event, securities traders will be exposed more in extreme market. And because of that, securities traders need to be careful when carrying out financing operations, however, as the commission competition getting more intense, securities margin trading interests has become the important source of income for securities traders, some securities traders will expand financing operations aggressively due to the lack of risk monitoring.“Futu Securities customer wearing this time is an example, Futu Securities share price has doubled and above compared to the end of last year, in order to maintain the share price at the high-order, then high growth is a must. High interests can only be received if more people are using it, this could be the reason of Futu Securities loose risk monitoring, just the systematic risk behind it cannot be looked down.” they said.In fact, Futu Securities’s risk system has been criticized by users on August 2020. Some clients have claimed that the purchasing power calculation of Futu Securities is disordered, on the one hand, US stock trading account is different from Hongkong’s, on the other hand, accounts are restricted to each other, for example, before American stock stagging, Hongkong money need to be exchanged to USD compulsively, transferring into US stock accounts、freezing of stagging funds will affect main account risk rating and etc.“Risk monitoring is the foundation of securities operation. Careless cash deposit loans will put securities traders under the concentrated risks, will form threats to customer benefits.” a Hongkong marketing profession said.
