Robinhood and Interactive Brokers: The Trading Trap

US: Event Contracts by Robinhood, Interactive Brokers: Trading or Betting? Is it Safe?

Washington D.C. [US], Oct 25 (NewsNow) - The rise of event-based contracts on popular trading platforms like Robinhood and Interactive Brokers has raised concerns about whether these instruments are suitable for retail investors.

Event contracts, also known as "binary options" or "prediction markets," allow traders to bet on the likelihood of a specific event occurring, such as the outcome of a sports game or the direction of a stock price. The contracts typically have a fixed expiration date and a fixed payout, with the trader either winning or losing the entire amount.

The contracts have gained popularity in recent years, particularly among younger investors who are drawn to their simplicity and potential for high returns. However, experts warn that these instruments are often unsuitable for retail investors and can be a recipe for disaster.

"Event contracts are essentially a form of betting, and they should be treated as such," said Michael Peroni, a financial advisor with the Financial Industry Regulatory Authority (FINRA). "They are not a suitable investment for most people, and they can be very risky."

One of the main concerns about event contracts is that they are often traded on unregulated markets, which can leave investors vulnerable to fraud and manipulation. Additionally, the contracts are often highly leveraged, meaning that a small change in the underlying market can result in a large loss.

Robinhood, a popular online trading platform, recently introduced event contracts to its platform, allowing users to bet on the outcome of sporting events and other events. Interactive Brokers, a professional trading platform, has also offered event contracts to its clients for several years.

However, both platforms have faced criticism for allowing retail investors to trade these contracts, which many experts believe are unsuitable for novice investors.

"The fact that Robinhood and Interactive Brokers are allowing retail investors to trade event contracts is a concern," said Peroni. "These platforms should be more careful about the types of products they offer to their customers, especially those who may not fully understand the risks involved."

In response to the concerns, Robinhood has implemented several safeguards to protect its users, including a minimum account balance requirement and a maximum position size. Interactive Brokers has also implemented safeguards, including a minimum account balance requirement and a risk-based margining system.

Despite the safeguards, many experts believe that event contracts are still not suitable for retail investors. "These contracts are a form of betting, and they should be treated as such," said Peroni. "They are not a suitable investment for most people, and they can be very risky."