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Robinhood Traders Discovered a Glitch That Gave Them ‘Infinite Leverage’

• eigenvalue 7y ago
  It will be interesting to see if Robinhood will go after (i.e., pursue claims in court) teenagers who get carried away and rack up $50k+ deficits from this. The article links to a Youtube video of a young person watching their account (which they used this bug to accumulate a $50k+ position in Apple puts right before they beat earnings recently) evaporate in front of their eyes, going deep into negative territory. Even though Robinhood has a good legal claim here, it would be very bad PR for people to start thinking that they can lose a lot more than they put into their accounts. Bad enough that you can lose all of that in the blink of an eye with margin trading, but it should be impossible to mortgage your whole future that way!
  • deleted 7y ago
    [deleted]
  • hailwren 7y ago
    Even if Robinhood goes after them, they don’t have any assets or money. Unless there are criminal charges (which there might be), what could actually happen?
    • eigenvalue 7y ago
      They could win a legal judgement that might not be able to be discharged in bankruptcy. Even if they can't pay it now, they might have their wages garnished in the future until it is repaid. Also, if they are minors, their parents might pay it to avoid their kid's credit being ruined for decades because of bankruptcy.
      • sethammons 7y ago
        bankruptcy should only be on your record for 7-10 years. And a minor can't be held accountable to any kind of contract. I would think that first, RobinHood would be outta luck. Secondly, the kid. Lastly, the parent. As a parent, I would tell my kid "sorry bucko, you don't get to buy a car for the next decade."
        • toomuchtodo 7y ago
          Bankruptcy is not as bad as everyone makes it out to be. You can get an FHA mortgage 1-2 years (depending on circumstances) after the discharge date. You can get a non-QM (not Fannie/Freddie/FHA backed) loan the next day at a higher interest rate (~200-300 basis points above prime), which you're only going to carry for two years until you can FHA refi. You'll get a secured credit card. You'll pay more for an auto loan. But you'll get credit nevertheless because you can't go BK again for another 7 years. You will pay more for that credit, but you will still get it. Walking away from certain levels of dischargeable debt is entirely reasonable. That is why we have bankruptcy as a financial tool. Some states are better about protections against creditors than others. Don't live in a state with poor creditor protections (Florida is fantastic, Missouri is terrible).
          • sharemywin 7y ago
            don't forget prosper and lending club. although non-QM loans generally require 20-30% down.
          • edoceo 7y ago
            200-300 basis-points means 2-3% (for the non-finance types). So your 6% loan is now a 9% loan.
            • toomuchtodo 7y ago
              Prime mortgages hover around ~3-4.5% currently. Non-QM is ~5.5-8 percent, looking at a non-QM lender's rate sheet right now (dependent on loan to value, assets, and income). So about what you'd pay for a HELOC or higher rate home equity loan. Even with garbage credit you're not paying 9% on a property that you've got some equity in, but you're not getting a mortgage with only 3% down (nor should you; go rent for a year or two with a landlord who will report positive payment activity to CRAs and then go get your federally backed FHA loan with only 3% down).
    • Waterluvian 7y ago
      I think this is called being judgment proof. I think robinhood gains nothing other than forcing bankruptcy upon them?
  • toomuchtodo 7y ago
    Robinhood will likely not, considering they are grossly non-compliant with Regulation T (and have been reported to the SEC and FINRA regarding this issue), which governs margin requirements. This is someone's risk management system failing on a trivial use case.
    • eigenvalue 7y ago
      I agree that they are unlikely to go after them, but I think if you read the fine print of the margin product, the customer agrees that the borrowed money is a debt and must be repaid. Also RH could argue that the customer acted in bad faith, being fully cognizant that what they were doing was against the rules.
      • toomuchtodo 7y ago
        Robinhood extended margin it was not legally permitted to extend (Reg T is federal statute, btw). I am very interested in sitting in any court room as an observer where their counsel attempts to collect.
        • SpicyLemonZest 7y ago
          But they didn’t intend to, right? If I steal money from a broker’s desk drawer and use it to do dumb futures trades, surelt that’s not a regulatory violation on the broker’s part.
          • toomuchtodo 7y ago
            Great case to make that you are so incompetent as a broker-dealer that someone was able to extend themselves 250x leverage on the margin you extended. That's how you lose your broker-dealer license, which means your business dies if you're Robinhood (unless they're only going to offer a cash management account, which I guess might be a thing? even Credit Karma and Personal Capital are offering one now). As a broker, risk management is your job.
  • MuffinFlavored 7y ago
    > it would be very bad PR for people to start thinking that they can lose a lot more than they put into their accounts I don't know if it would be bad PR... The guy very deliberately leveraged himself because he thought he'd gain social approval from his peers at r/wallstreetbets It's a great public service announcement for: just put your money into index funds and stop trying to gamble on stock earnings.
    • cortesoft 7y ago
      But that is the exact opposite message that Robinhood wants to send (even if it is the correct message).
      • MuffinFlavored 7y ago
        I think Robinhood wants to send the message that they offer a simple, elegant stock trading app. I feel (no proof) that they target people with net worths of less than $50k to come and trade a few stocks. AAPL, TSLA, NFLX, MSFT, GOOG, etc. I don't think they actually want you to trade on margin. It's just, some people are addicted to volatility / the chance of "sweet gainz" and they see "regular Joe" posting pictures of turning $1k into $100k by making "the correct lucky" options trade, so they are down to try to do it too. I don't think that's Robinhood's message. It's just a side effect of having an easy to use app with no fees.
        • gowld 7y ago
          RH can simply not offer margin if they don't want their customers to use margin. "not handing out money" is the traditional way that anyone avoids the risk of losing money due to handouts.
        • squeaky-clean 7y ago
          > I don't think they actually want you to trade on margin. Have you used RH? I use it for exactly your example, every other paycheck I put some in VOO and a bit on some individual stocks. They push Robinhood Gold so hard. There used to be a glowing gold banner at the top of your portfolio advertising to join gold and get $10,000 today or whatever.
  • tempsy 7y ago
    I believe Robinhood is violating Finra rules around margin trading though. Do they really want to go to court and claim incompetence on their own part? Trust is everything in fintech. Now that this story has moved from one obscure subreddit to Bloomberg I don't know how they start to reclaim it if they cannot calculate numbers correctly as a brokerage. The consensus on /r/wallstreetbets is that Robinhood is a joke, which is pretty much the last thing you want to be thought of as a financial services provider.
    • H8crilA 7y ago
      Indeed, they should be worried about their own skin. The SEC should shut down their operations immediately, at least anything that involves margin. Like today. It's not even about PR, this is a pretty bad violation of federal law. We don't know how many people may be using it. This is the financial equivalent of forgetting to check password on a login form. It's that stupid.
      • AznHisoka 7y ago
        If they shutdown their operations today, that would be incredibly detrimental to existing users. what if I held an option expiring this week? Am I forced to let it expire because the SEC forced them to shutdown? Seems like a douchebag move. sensible thing would be to remove margin from all accounts. if you want to prevent anymore transactions, at least give people some heads up so they can liquidate time-sensitive positions.
    • ozi 7y ago
      > I believe Robinhood is violating Finra rules around margin trading though. Yeah, this is why the scenario is unique to most other r/wallstreetbets losses. With a good attorney the guy may come out of this relatively unscathed.
    • pc86 7y ago
      How long ago was the whole /u/ir0nyman debacle with box spreads? RH's incompetence in the regulatory space has been pretty well known for quite a while now (well before ir0nyman).
  • jjeaff 7y ago
    Are we talking 18-19 yr old teenagers? Because anything less and they shouldn't be able to have an account on their own. And of they do, then Robinhood would be sol. You can't enforce a contract on a minor. (although, interestingly, a minor can enforce a contract on an adult)
    • LandR 7y ago
      Is 18-19 considered a minor in the US?
      • bnjms 7y ago
        No. Age < 18 is considered a minor. Everyone on r/wsb calls each other autists and uses old 4chan slang like teenagers. I think some of the guys who caused Robinhood to change their system were minors.
  • superfrank 7y ago
    I visit /r/wsb pretty frequently, so I would like to add two bits of information that might change your mind. 1) The user /u/ControlTheNarrative (CTN) made plenty of posts before losing the money where he made it very clear he knew exactly what he was doing. He had a post where he spelled out exactly how to gain the extra leverage and that his "personal risk tolerance" meant he could handle 25:1 leverage. Additionally, his response after the fact was something along the lines of "once I earn another $2000, I plan on doing this again". This kid didn't just click a wrong button and end up with the extra leverage, he was well aware of what he was doing. 2) Take this one with a major grain of salt, but based CTN's comments in the original posts and some comments by other users, it seems like this might not have been the first time CTN has used this exact trick to blow up an account. When the video was first posted, multiple commenters mentioned that he'd done it before and some of CTN's comments after the fact seem to hint at that. Again, take this with a huge grain of salt since I have nothing concrete to back that up. The last time RH was in the news for some user losing way more money than they had (IR0NYMAN) I actually felt for the user a little bit and can understand why RH (supposedly) didn't go after the money after the fact. IR0NYMAN was creating box spreads, which can be a legitimate strategy, although they are very hard to find a situation where you can make money with them. That user stupidly didn't understand RH's rules around options exercise which is how he got screwed, but had he been able to hold all his contracts to exp (like European options allow) he actually would have been fine. I can understand RH writing off IR0NYMAN's debt because it didn't seem like the user truly understood what he was doing, but this one feels different, IMO.
    • KnMn 7y ago
      Very important context. Thank you.
    • ryandrake 7y ago
      If you try to sign up for options (or margin) trading on any brokerage, none of them will let you do it unless you affirmatively confirm that you understand that: not only can you lose your ass trading derivatives, but you can lose asses that you don’t currently have and you can lose asses that you didn't even know exist. Doesn’t RobinHood have these disclosures and gates?
  • mindslight 7y ago
    I'd expect the gamblers will simply be bailed out. That is the precedent from 2008, is it not?
  • kccqzy 7y ago
    > it would be very bad PR for people to start thinking that they can lose a lot more than they put into their accounts LOL WAT? If you are using the margin feature of your brokerage account it should be implicit that you understand you will lose more money than you have. Many people have bankrupted even due to a temporary fluctuation in pricing causing margin calls. This is true even if you don't trade options, just less likely so. Personally I trade options but I don't enable the margin feature on my account. Then the worst case scenario is I lose everything I put into the account; I wouldn't lose the money I didn't put in my account.
    • koolba 7y ago
      It’s not implicit, it’s explicit in the margin agreement you sign to create or extend the account. You’re also on the hook for any excess losses that are not covered by cash in the account. They can and will go after the rest of your external assets.
    • jacquesm 7y ago
      > will Can. It is isn't a certainty for those that understand, but if you don't understand that will is probably correct.
    • perl4ever 7y ago
      Well, it's not normal to lose more money than you have, even if you are investing on margin, because obviously that creates risk for the people you owe that they don't want. That's why there are minimum equity requirements and your positions can be liquidated without even a margin call if necessary.
  • CPLX 7y ago
    A million YouTube views is worth a couple grand right? Maybe there's an upside for this guy after all. 2019 is weird.
    • Jhsto 7y ago
      Much depends on the ad network. The default YouTube one, which is essentially the only network you can easily get into with a single video, paid me 23 cents CPM for video-game genre.
    • Itsdijital 7y ago
      You need 1k subs to monetize
  • kpU8efre7r 7y ago
    FDs all day!
  • Havoc 7y ago
    >It will be interesting to see if Robinhood will go after (i.e., pursue claims in court) teenagers who get carried away and rack up $50k+ deficits from this. The PR would be a disaster.
• abhisuri97 7y ago
  Of course /r/WallStreetBets did this.
• cascom 7y ago
  these people should just trade futures - you can buy a treasury bond future at effectively ~70x leverage without trying to defraud your broker...
  • eigenvalue 7y ago
    Real brokers like InteractiveBrokers make you fill in a survey where you detail your experience and trading history before enabling you to do highly levered futures trading (and lying to them about this dramatically weakens any legal protections you might otherwise enjoy as a customer). Also, they have much tighter risk controls and will liquidate an account automatically if it gets to a dangerous level. And they also require a significantly larger account size before they will enable margin-- an amount that most teenagers are unlikely to have in liquid assets.
    • sitzkrieg 7y ago
      all futures brokers have to do this to extent, and theyre all good things. you can day trade futures (ignoring newer cme e micros) with a $500 deposit and its an awful idea for a plethora of reasons, but grown adults do it day in and day out blowing out over and over. its clear this leverage needs a little more oversight. i will note however, i found myself over leveraged in an options position in august 2015 using TDA, and my account went very negative as the platform went completely down for the entire day and no automated or human risk liquidated it on their side..
      • eigenvalue 7y ago
        What happened in your case? Did you have to pay back the loan or were you able to walk away from it?
        • sitzkrieg 7y ago
          this was futures options positions. when the platform came up the next day (mind you, no one was answering the phone the times i called, i bet others got killed), I had money in my account so i didn't get what i completely deserved. I was trying to get some hedges in as soon as ES opened limit down again and i did manage to get a few off. ToS data was nearly instantly frozen so I was using another feed to gauge my orders. I digress with thinkorswim is not good for heavy intraday (and the market data is pretty bad anyway). after this event, i changed brokerages and focused 100% on day trading and make a living, so it wasnt all bad i guess! I can only image robinhood has no risk desk, or automated system that do not work correctly for non-trivial option legs
• webninja 7y ago
  “...I repeat this until I am sufficiently leveraged for my Personal Risk Tolerance. Right now I am at 25x leverage because I had 2000 dollars in Instant Deposits.” Of course it’s within his risk tolerance. He has the potential to turn $50K into a lot more money and would only lose $2k if it goes south (and it did.) It’s going to be a sad day if Robinhood goes under because a bunch of gamblers lost Robinhood a couple million dollars. It’d also be sad for them if in later developments they find out their Margin Call feature didn’t work as advertised.
  • account73466 7y ago
    Well. Robinhood then should better debug their platform unless these bugs actually make Robinhood more money when people overleverage, lose and don't advertise it online.
  • deleted 7y ago
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  • u10 7y ago
    it's their own damn fault. Turns out "Move fast and break things" doesn't necessarily apply to all industries.
    • deleted 7y ago
      [deleted]
  • verroq 7y ago
    If you lose 50k it is your problem, if you lose 50m it is the Robinhood’s problem now.
    • Ambele 7y ago
      If someone loses 50m, it could become a problem for everyone with a margin account or everyone with a cash account and uninvested cash in their Robinhood account due to Rehypothecation Risks. But first it would be a problem for the owners of Robinhood private stock as their shares are severely diluted for huge equity infusions.
• bdz 7y ago
  I really liked this ELI5 explanation how does it work https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infinite_leverage_explained/ https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infi... The original guy (CTN) stopped at 50k and posted the famous video where he basically lost everything but that's another story lol https://www.youtube.com/watch?v=A-tNkuYV4_Q https://www.youtube.com/watch?v=A-tNkuYV4_Q People were speculating that what would be the uppermost limit before Robinhood does anything and turns out you can even get $1m...
  • twic 7y ago
    Bear in mind that an ELI5 constitutes an advanced level of understanding on r/wallstreetbets.
    • Loughla 7y ago
      r/wallstreetbets is consistently one of the highest quality subreddits when it comes to pants-shittingly stupid decisions paying off for the group (in terms of comedy, not actual money or wise investments). For strict entertainment value, I rank it higher than any other site on the net. They're really everything great and terrible about the internet and investing. I love it.
      • Phillipharryt 7y ago
        I think part of what makes it so hilarious is the real-life effects. Other communities might have inside jokes but on WSB they're references to times people committed financially insane actions with real consequences. There's not only hilarity, but a morbid curiosity that makes me laugh and gasp at the same time.
        • magashna 7y ago
          But there are also the situations where some concave skulled moron manages to be so stupid, it actually costs a company like Robinhood and WSB comes out on top (see - 1R0NYMAN)
• nullc 7y ago
  Makes smartphone investment product catering to unsophisticated and younger investors. Makes options trading available to these customers. Screws up risk management by incorrectly adding the value of those positions to customer's margin liquidity. Incurs losses as a result. ::surprised pikachu:: "If you take advantage of someone’s mistake to line your own pockets, you need to pay them back." -- if that were the actual governing law I can only imagine that many brokerages catering primarily to unsophisticated investors (not to mention credit cards, and many other financial services) would be having a pretty bad time.
• rdlecler1 7y ago
  Robinhood has lots of bugs. Several of investments show an average cost of $0.00 with no market buys. And yesterday it was showing results out to Q2-2020 (?). I email them and they don’t address it.
  • my_username_is_ 7y ago
    >And yesterday it was showing results out to Q2-2020 (?). This could be due to an individual company's financial calendar. For example, Proctor & Gamble (PG) released their 2020Q1 results 2 weeks ago.
  • oomkiller 7y ago
    Yes, I've reported a bunch of these as well. Basically any sort of corporate action (split, reverse split, merger, etc) seems to completely screw up their "gain" calculations, which are prominently displayed throughout their app. This basically makes it impossible to determine your returns, unless you have a paper record somewhere. Many of the cases I've run into here also completely lose the record of what you paid and how many shares it was for. I'm hoping their new home-grown clearinghouse generates my tax info properly...Still looking for a better option.
  • hogFeast 7y ago
    Aren't they supposed to only hire these Ivy League super geniuses and ex-FAANG HackerRank masters (I am not in the US so I genuinely don't know)? It is kind of funny to see these tech geniuses fuck stuff up that non college educated degen brokers understood decades ago.
    • sdenut 7y ago
      [redacted]
    • salawat 7y ago
      HackerRank measures your adeptness at answering contrived programming questions. Not domain knowledge application to keep yourself from unknowingly creating a system that automates Federal Reserve margin trading regulation violations. Also, given FAANG's current position, (of all being in one way or another under Congressional/regulatory scrutiny) I'd say that HackerRank fixation isn't turning out so hot.
• tempsy 7y ago
  The person that posted the $1M position using $4K (https://www.reddit.com/r/wallstreetbets/comments/drqaro/robinhood_free_money_cheat_works_pretty_well_1/ https://www.reddit.com/r/wallstreetbets/comments/drqaro/robi...) hasn't said that Robinhood has shut him down yet, which is crazy to think. Ultimately Robinhood screwed up, so I don't know if they really want to expose themselves any further by trying to go to court with any of these people. That would do more damage to their reputation/valuation than resolving these cases as quickly and amicably as possible. I personally can't believe this is still unresolved, though. The original $50k Apple puts guy uploaded the video last week, and these copycats were still able to exploit the issue. As on right now, I don't think it's yet fixed. Why didn't Robinhood fix the bug over the weekend? Why aren't they treating this like a massive legal issue/regulatory violation? It's so strange.
  • mattnewton 7y ago
    IANAL but I assume offering unlimited leverage to retail investors is also illegal or at least against SEC guidelines. Besides, if I was insuring RH right now I would be talking about increasing premiums.
    • gowld 7y ago
      No need to increase premiums unless RH has a claim that's covered by their policy. "lol we give away money to whoever asks for it" might well be excluded.
    • sb057 7y ago
      According to some random person on the subreddit who probably isn't a good source, the SEC limit for leverage for normal people is 2:1.
      • dmurray 7y ago
        2:1 is correct. Or 1:1, depending on your definition of "normal people". The relevant rule is called Reg T and it's not a limit set by the SEC, but by the Federal Reserve.
      • 7y ago
• opportune 7y ago
  Someone on reddit posted this, which makes it seem like Robinhood support is actually ok with the strategy: https://m.imgur.com/a/g4tpH9y https://m.imgur.com/a/g4tpH9y Of course I can’t verify the authenticity, but it doesn’t look good for them. In particular it seems almost financially smart to make incredibly risky plays on huge amounts of margin if you actually have very little in terms of assets, because the downside is you declare bankruptcy (doesn’t matter, you had no money) and the upside is hundreds of thousands of dollars
  • tempsy 7y ago
    They aren't OK with it - it's a legitimate bug because it violates FINRA rules around margin trading that they have to comply with.
    • opportune 7y ago
      I agree that it violates my layman understanding of FINRA, I’m just saying that RH support doesn’t seem to be aware of that
      • tempsy 7y ago
        Well it's not their frontline's fault but RH's executive team that is ultimately responsible. They've been in business for 6-7 years now and just discovered this issue? It's unacceptable, IMO. Hard to take them seriously when things like this happen.
        • deleted 7y ago
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        • Itsdijital 7y ago
          You ever use RH? It's been hard to take them seriously since day 1.
      • Ambele 7y ago
        It's funny because this is how money is created in the American Economy -- through recursive loans like this from banks. Since most money is digital now, nearly every loan becomes another person's bank balance and every bank balance is subject to be lent out. With a federal reserve requirement of 10%, the theoretical max leverage ends up being 10x so $100,000 of bank-created money for every $10,000 entering the banking system. This assumes the system works as intended and a bankster hasn't yet found a Robinhood-like glitch in the financial system to create unlimited money.
• brobinson 7y ago
  From the article: >The problem arises when Robinhood incorrectly adds the value of those calls to the user’s own capital. This is not precise. Premiums received from short options positions _do_ get added to your "capital" and show up as cash in your account. You will accrue interest, etc. on this cash like any other cash in your account. The premiums should _not_ increase your margin/buying power which is where RH made a mistake.
  • ThrustVectoring 7y ago
    Not quite. The issue is that Robinhood incorrectly valued the stock collateral covering a short call position. It should be valued at the strike price of the call option, rather than the current spot price of the security. Eg, suppose FOO is trading at $100/share, and you have $5k of cash and $5k of free margin. You use all $10k to buy 100 shares, then sell a call option with a strike of $60 for $40/share. Under RH's calculations, you have $5k of account equity, $10k of stock and $4000 of cash from selling the call. This qualifies you for a margin loan of up to $9k. Under the correct calculation, the stock is only worth at maximum the $60/share strike price of the short option, since that is the cash you'd get if the option is exercised. So you have $5k of account equity, $4k of cash, and $6k worth of net marginable securities. The advantage of this is that it treats out-of-the-money covered calls better. If you sold a call option on FOO with a strike of $105 for $2/share, you should have $200 extra free to spend on stuff. Selling extrinsic value should wind up generating net cash that users can use for whatever purpose they want. Selling intrinsic value, on the other hand, is selling a portion of the economic right to the underlying.
    • semiotagonal 7y ago
      This seems like the sort of thing that happens when the people writing the code don't know the domain, and the domain experts can't express how the software needs to be tested.
      • ThrustVectoring 7y ago
        This entire class of bugs should be caught via fuzz testing. Swap out the live back-end with one that fakes execution against a snapshot of prices, do whatever you can do, and verify position sizes are within leverage limits.
• rm_-rf_slash 7y ago
  The GUH heard ‘round the world. It should be noted that r/wsb is having a field day with people abusing the system left and right for lulz. At this point, the issue for RH isn’t as much their bug as it is herd behavior.
• tenpies 7y ago
  If you have any amount of money or equity held by Robinhood, you should seriously consider moving it to another broker. This has the potential to end the company financially (at least until another round of funding bails them out) or regulatory (if they lose their licence over this).
  • AznHisoka 7y ago
    Let's say RobinHood went out of business tomorrow. What would happen to all the stocks held by their customers?
    • TheHypnotist 7y ago
      This should explain it. https://www.investopedia.com/articles/investing/050515/what-happens-when-stock-broker-goes-bust.asp https://www.investopedia.com/articles/investing/050515/what-...
      • AznHisoka 7y ago
        OK, that's sensible. So I guess there's really no need to do anything dramatic if you're a Robinhood customer, if you don't have over $500K in cash/securities.
        • brisance 7y ago
          Robin Hood customers absolutely should consider switching. These are the basics, and they can't even get it right. Would you trust a GP who didn't know how to use a thermometer? What happens if it's the other way around, and the customer's account shows a net profit but their books don't reflect that?
          • AznHisoka 7y ago
            It's a bug with a non-normal use case. Most people don't use margin, and they don't sell covered calls, let alone do both. I just buy and hold regular shares, so I don't forsee how they can mess that up in anyway. If they do, I definitely will move my account elsewhere. But for now, it's still a huge hassle to move everything to another brokerage.
• H8crilA 7y ago
  Summary: Robinhood's margin system is completely broken and allows for practically infinite leverage. One guy leveraged up to 1'279'550 USD on a 4'000 USD deposit. Current "leaderboard": https://www.reddit.com/r/wallstreetbets/comments/drt5tr/guh_of_fame_2019/ https://www.reddit.com/r/wallstreetbets/comments/drt5tr/guh_... And an outbreak of memes on Reddit: https://www.reddit.com/r/wallstreetbets/comments/dr4iem/control_your_autism/ https://www.reddit.com/r/wallstreetbets/comments/dr4iem/cont... https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this_one_is_for_the_history_books/ https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this... https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_new_brokerage_war/ https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_... https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_something_im_guhving_up_on_you_official_music/ https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_... https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_light_of_todays_events_i_have_decided_to_be/ https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_l... People wondering what is Robinhood even doing, and that it's in violation of the federal law: https://www.reddit.com/r/wallstreetbets/comments/drmr6y/how_the_fuck_does_robinhood_exist/ https://www.reddit.com/r/wallstreetbets/comments/drmr6y/how_... https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this_sub_has_gone_to_a_new_level/ https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this... https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robinhood_is_in_violation_of_finra_rules/ https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robi...
  • tomp 7y ago
    Haha thanks for this, I haven’t been laughing this hard in weeks! The best meme was someone saying, it’s now only a matter of time before Masayoshi Son invests in Robin Hood!
• rebuilder 7y ago
  Has this been fixed yet? It seems like a company-ending disaster for Robinhood if the bug remains exploitable now that it's on Bloomberg.
  • pnako 7y ago
    If they actually have a proper portfolio pricing model (to compute the available margin), and they're just missing one use case, then that should be relatively simple to fix. A few days, or a few hours if they really put their heart into it. If they're completely lacking an option pricing model... they're just not going to add one overnight. They'll have to add a standard model (most likely Black Scholes), come up with an estimation of volatility to feed into it (you can extract it from the market; implied volatility), and also solve the problem of linking derivatives to their underlying. In any case this is not a simple arithmetic accounting issue.
    • Itsdijital 7y ago
      This seems to the be case given that so far all they have done is freeze accounts and blacklist attractive options of used for this play.
• deleted 7y ago
  [deleted]
• synaesthesisx 7y ago
  This is legendary - leave it to WSB for gaming this. The fact that Robinhood even allows recursive margin is a total failure on their part.
  • rb808 7y ago
    I'm just waiting for Bloomberg to add haupt91 videos on the front page.
• tempsy 7y ago
  The person that got $1M has very limited upside though because they sold deep in the money call options on the same stock that they own, Ford ($F). This is known as a covered call e.g. as the price moves up your stock is worth more but the premiums on the call options you sold increase as well, limiting your profit. On the other hand, if the stock tanks you will still lose, though the premiums from your options you wrote will cushion your downside. The Youtube guy owned naked puts, which is far riskier than covered calls.
  • H8crilA 7y ago
    Selling deep ITM options is one step in the "hack" to create infinite leverage / infinite buying power. Buying weekly OTM options is the "yolo" they do once they mess up Robinhood's margin into giving them hundreds of thousands of USD of buying power.
    • tempsy 7y ago
      Right, but looking at the $1M guy's positions he doesn't own naked calls/puts it's mostly a covered call on $F.
      • H8crilA 7y ago
        That's actually super smart. If you ever get such ridiculous margin you should buy things that have high chances of very small profit, such as selling deep OTM options or credit spreads. Wait for expiration, unfold the scheme, collect your profits, disappear. If you leverage up to $1M a small 2% profit with 95% chances of success is an easy thing to achieve by selling options, and would pay you $20k instantly. In the 5% outcome your margin will just totally blow up, like LTCM in 2000, or the whole idiotic concept of Value-at-Risk in 2008.
        • deleted 7y ago
          [deleted]
        • tempsy 7y ago
          Yeah curious what Robinhood does here e.g. if they close his positions right now he's probably made 5 figures or so given the upward move in $F. Do they let him keep it or what?
• blhack 7y ago
  How is this not fraud?
  • mc3 7y ago
    If a bank agrees to lend you $1M against your $500k house, and you are completely honest with them about your earnings (say $50k/year), send legit paperwork etc. then you accept the loan (even though you know it's "too much"), is that fraud?
    • rubbingalcohol 7y ago
      If you borrow money knowing you can't or won't pay it back then yes, it's fraud. But it's more complicated in this case, because the dude could argue he expected major gains and believed there was no way he could lose.
      • mc3 7y ago
        Yes, but "the dude can argue" can apply to the house example. "I planned to rent out the rooms". "I planned to get a better job". "The house is worth $1M to the right buyer", etc. If someone lends you money on the basis of honest information you present to them I don't see how it is fraud. It might be unwise to take such loans, but that's a different thing.
• gbronner 7y ago
  Quote of the day from the reddit discussion: Just block margin so she can't call you.
  • mc3 7y ago
    Just call her Margo.
• jedberg 7y ago
  Given Robinhood's lack of quality control, I'm not sure why anyone uses them anymore. ETrade has free trades now (thanks Robinhood!) and a much more robust platform and API, and a hell of a lot more assets backing them. What is the advantage of Robinhood over ETrade at this point?
  • Loughla 7y ago
    >What is the advantage of Robinhood over ETrade at this point? This type of yolo nonsense and pure comedy value, from what I can gather.
  • tempsy 7y ago
    There's no advantage at all. Any other brokerage is better than they are. I think Robinhood's valuation is probably nosediving off a cliff right now.
  • zelly 7y ago
    There is no advantage. Their only edge was $0 commissions. They're definitely going out of business. Robinhood is going to be a legendary example of how first-mover advantage doesn't work.
  • sergiomattei 7y ago
    Same reason people use Dropbox over a command line hack job for syncing files. User experience. It's just that much better.
  • jdashg 7y ago
    Better margin rates than anyone except InteractiveBrokers, and Robinhood is easier to use for sure. (having used both) ETrade's margin rates are over twice what Robinhood's works out to.
• gatherhunterer 7y ago
  I recommend you read the article’s legal input before you try this for yourself. Apparently the best case scenario is that those who exploit this pay restitution and the worst case is that they are tried for securities fraud.
• seffignoz 7y ago
  (I also posted this on /r/wallstreetbets) CLEARLY, Robinhood knows about the infinite leverage bug, they have the capital, resources and engineers to fix it in a day if they want. Why are they not doing it? Are they stupid or what? Let's think about it for a second. There are two possible outcomes here: Let's say you do some leverage, and then use that leverage to lose 100k+, they can eat the loss briefly, and then they use collection agents to collect YOUR money. Robinhood will recoup the 100k$ You use the same leverage to gain 100k+, then, when you go to cash out to your bank, their audit team blocks the payment, saying that you "Violated the Terms of Service", by using a bug to make that amount of money. Thus, robinhood pockets 100k$. You can't sue them to get that money back, because you violated their TOS. If I was Robinhood CEO, that's what I would do, a 100% legal, safe way to get rich quickly. Prove me wrong.
  • kbar13 7y ago
    nice business plan why dont you launch a startup with that idea prove me wrong send tweet
  • compiler-guy 7y ago
    OK then: Outcome 1: "they use collection agents to collect YOUR money. Robinhood will recoup the 100k$" Only if the loser has $100k. Which they probably don't. Also, this ignores collection costs against people who do. Outcome 2: You have a lawsuit from someone dealing with the TOS. You also forgot Outcome 3: The SEC comes calling and fines you far more than $100,000 for allowing margin to unqualified investors.
  • itake 7y ago
    > they use collection agents to collect YOUR money These users do not have the assets anywhere to cover these debts. The best RH could do is negotiate a lower terms and hope they just don't file bankruptcy. That $100k is really worth closer to $0k when the person you lent the money to has no assets and no income.
  • ajross 7y ago
    > CLEARLY, Robinhood knows about the infinite leverage bug, they have the capital, resources and engineers to fix it in a day if they want. Not in all cases. Not all leverage is visible to them (though hiding it can certainly constitute fraud on the part of their customers). It's not possible to look at ownership of a security and conclude without error that the owner hasn't leveraged it in some other way. I think the bigger question is whether or not Robinhood's bug constitutes an actionable enforcement action by the SEC. There are rules about how this stuff is supposed to be accounted, and I'm absolutely certain they're in violation of a bunch of them. A fine is probably the median expectation, but I wouldn't be shocked to see them fold entirely. Hell I wouldn't be shocked to see someone there end up in jail when this is all done.
• tpmx 7y ago
  They don't seem to have a page for their exec team (isn't that odd? I looked really hard) so here's the next best thing: https://www.crunchbase.com/organization/robinhood/current_employees/current_employees_image_list https://www.crunchbase.com/organization/robinhood/current_em... (backup image: https://i.imgur.com/tEx7uT8.png https://i.imgur.com/tEx7uT8.png) "About us" in the footer now links to a separate careers site. I'm sensing a certain feeling of panicking/distancing going on here, because of that odd choice.
• jdlyga 7y ago
  I know basically nothing about finance. But /r/wallstreetbets is endlessly entertaining.
  • skizm 7y ago
    > I know basically nothing about finance. Neither does anyone on r/wsb, which is why it is entertaining.
    • adrr 7y ago
      Lot of it is a facade for entertainment value. A bunch of posters trade for a living. You’ll see screenshots of Bloomberg terminals.
      • goobynight 7y ago
        For reference, Bloomberg terminal costs $24,000 per year.
    • patrickaljord 7y ago
      Given the random ups and downs on the actual wallstreet, it would seem no one does. Makes sense as it's mostly gambling.
      • charwalker 7y ago
        Before the 1928 crash and subsequent regulation as well as going off the gold standard, instituting the Fed, and other things, the ups and downs were insane in both socks and inflation. Consider the DJIA here from 1919 to 1929: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart https://www.macrotrends.net/1319/dow-jones-100-year-historic... See inflation here for 1920 to 1929: https://inflationdata.com/articles/inflation-consumer-price-index-decade-commentary/inflation-cpi-consumer-price-index-1920-1929/ https://inflationdata.com/articles/inflation-consumer-price-... See the massive fluctuations in inflation as well as the DJIA? After the New Deal and other reforms, we not only hit post WWII American growth but a relatively stable upward trend in the markets and policy with targets like stable economic growth and more recently stable inflation (currently I think a 2% target). Regulation and restrictions plus Fed oversight has granted our modern economy relatively stable year over year growth and inflation. Stability means future predictions become ore accurate, economic panics/recessions can be not necessarily predicted but solutions approached strategically. Deregulation and instability can make people insanely rich similar to the hyper leveraging of this whole RH thing but one usually has to either be the know like via have insider information or be prepared to tank everything for their own arrogance like when some guys tried to corner the gold market in 1869 (Black Friday) or the onion market in the 1950's: https://en.wikipedia.org/wiki/Cornering_the_market https://en.wikipedia.org/wiki/Cornering_the_market This page where I pulled inlfation data is really neat. I'd recommend checking each decade with recessions: https://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx https://inflationdata.com/Inflation/Inflation_Rate/Historica...
• mrbonner 7y ago
  I tried to read the Bloomberg article & the subreddit wallstreebets but I cannot understand if this is just a mobile game people play or a real money scheme?
  • Phillipharryt 7y ago
    Robinhood is an app that lets you trade, it's all real trading on the same market as everyone else, it's just an app allowing you access. WallStreetBets is just a community of "investors" who trade on real markets, but with Robinhood having such a low barrier to entry they often trade using it. (Screenshots of Robinhood trades going really well or really badly are a staple of WallStreetBets humour).
• hammock 7y ago
  Isn't this essentially how the entire world economy works? This is exactly what it means when you saw headlines like "$60 trillion of derivatives are poised to come crashing down" around the time of the 2008 financial crisis. It's futures on leverage on futures on leverage, with all different kinds of counterparties sucked into the tangle.
• imroot 7y ago
  I think this will be the third time Robinhood has to address something that happened by way of /r/wallstreetbets...
• neonate 7y ago
  https://outline.com/sCeKc7 https://outline.com/sCeKc7
  • Cub3 7y ago
    Didn't know this service existed, how do they not get taken down for rehosting content without permission?
• wyxuan 7y ago
  Robin Hood said this behavior is okay
• jddj 7y ago
  As ridiculous as all of this is, there's some poetry in a company called Robinhood taking angel investment from various billionaires and using it to give millions of dollars in (probably) free leverage to teenagers.
  • vkou 7y ago
    But the real recipients of the money are the traders (hedge funds, market makers, etc) on the other side of the transaction. So, it's a cash flow of billionaires -> teenager margin account -> billionaires. "He stole from the rich, and he gave... Well, he airdropped the money over a gated billionaire neighbourhood." doesn't make the most catchy song for a folk hero.
    • SeanAppleby 7y ago
      Eh, if I did this and I came up in the black off on a play with $1M in free leverage I would just close the position, pay off the margin and dip without posting about it. If like five people posted about it and lost money, there are probably a couple winners who are lying low, even just completely randomly assuming the traders have absolutely no signal whatsoever in their choice of play.
      • vkou 7y ago
        But in that case, since the margin was returned, RobinHood, or its investors didn't lose anything. So, the analogy still doesn't hold. :)
        • Zarel 7y ago
          You're not understanding the math here. RobinHood is essentially lending unlimited money to the teenagers in question. Assume, as an oversimplification, half of them will win big, and half of them will lose it all. For the wins, the teenagers will keep it all, and for the losses, RobinHood will have to pay for it, because the teenagers don't have the money and will declare bankruptcy if RobinHood tries to recover it. This is a net wealth transfer from RobinHood to the teenagers. The net wealth transfer looks like this: teenagers: +lots of money traders on the other side of the transactions: approximately +0 (wins and losses cancel out) RobinHood: -lots of money You can play games with which money comes from where, but you can't deny the way the money is flowing on net.
• thedudeabides5 7y ago
  These are the assets that your Robinhood checking account is giving you (with SIPC). Aka, another bank. Why the SIPC allows them to run a half-baked investment bank providing free leverage to all is I guess the real mystery here.
• divbzero 7y ago
  Chris Sacca took advantage of a similar glitch in the early days of online brokerages. [1] The leverage yielded phenomenal returns before it sent him into $4M of personal debt. It took him years to climb back up to $0. [1]: https://www.financemagnates.com/forex/brokers/chris-saccathe-4million-negative-balance-salinger-group-twitter/ https://www.financemagnates.com/forex/brokers/chris-saccathe...
  • HanayamaTriplet 7y ago
    He was able to negotiate that $4M debt down to $2.125M, [A] proving once again that if you owe the bank $100 million, it's the bank's problem. [A]: https://pando.com/2012/11/01/how-chris-sacca-turned-his-student-loans-into-12-million-and-then-lost-it-all/ https://pando.com/2012/11/01/how-chris-sacca-turned-his-stud...
• oarabbus_ 7y ago
  As a RH user, the fact that this is possible really scares me that there will be intervention/repercussions and that Robinhood doesn't know what they're doing. Is it possible for the FTC (or whichever entity) to freeze these guys' operations? Should I liquidate and move all my shares elsewhere ASAP?
  • bojo 7y ago
    As someone posted elsewhere, you are fine: https://www.investopedia.com/articles/investing/050515/what-happens-when-stock-broker-goes-bust.asp https://www.investopedia.com/articles/investing/050515/what-... That said, the only thing RH really has going for it is their decent UI experience. Everything that else matters sucks: Customer support, terrible price fills, uptime, and apparently their ability to write software which protects the end user as we are finding out. As an option trader on the side I moved to Tasty Works awhile back, the same team that made TD Ameritrade's Think or Swim software, and a company which runs a daily 8 hour show focused on learning for free. Shameless signup link with referral code: https://start.tastyworks.com/#/login?referralCode=2GSNAJGJSQ https://start.tastyworks.com/#/login?referralCode=2GSNAJGJSQ
• dingdongding 7y ago
  This is perfect for their name. Passing money from rich (VCs) to poor people
  • perl4ever 7y ago
    If someone gets a lot of leverage, makes a wild bet, loses, and then there is an uncollectable debt, then someone out there made a lot of money that Robinhood is possibly out, and the recipient probably wasn't poor beforehand. Robin Hood of myth was not a person known for being robbed by poor people who gave his wealth to the rich.
• mv4 7y ago
  Wow. And I thought this (amateurs building financial systems) only happened in crypto. Just wow.
• djfergus 7y ago
  Why doesn't Robinhood just close the positions? I'm pretty sure you could try something similar at any broker (write options, use the premium to buy on margin, rinse repeat), not all will block the trades but they do an account exposure/margin assessment periodically (hourly? daily?) and then take action. For example a full service broker might call you and tell you to get within limits (a "margin call"). Low cost brokers like IB will just close all your positions regardless of loss.
• ganitarashid 7y ago
  Now that trades are free everywhere, nothing sets apart Robinhood anymore. Robinhood may yet become the next WeWork.
  • missedthecue 7y ago
    No one else offers free options trades aside from RH
    • perl4ever 7y ago
      Considering the size of the spread on most options, why would you focus on commissions?
  • jquery 7y ago
    The lack of professionalism that should scare off any serious investor sets them apart.
  • jdashg 7y ago
    Robinhood still has one of the best margin accounts: Almost as low of rates as InteractiveBrokers but with a much, much simpler UX wrapped around it.
• zelly 7y ago
  Chris Sacca (legendary VC) exploited a similar bug in his early days. https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick_&_West https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick... > Sacca used his student loans to start a company during law school, and when the venture proved unsuccessful he used the remaining funds to start trading on the stock market. By leveraging trades for significant amounts (discovering a flaw in the software of online trading brokers in 1998)[18] he managed to turn $10–20 thousand dollars into $12 million by 2000.[19] Eventually, when the market crashed, Sacca found himself in debt with a four million dollar negative balance.[18] He negotiated to have it reduced to $2.125 million[17] and had repaid it by February 2005.[18]
• NoblePublius 7y ago
  How does this company still have a BD license?
• jsf01 7y ago
  The new high score is $1.7mil. Bloomberg can’t keep up!
• jyriand 7y ago
  I’m not really well versed in stock trading but isn’t there a thing called margin call that would close the position once the traders loss is close to his balance? Why isn’t it happening in this case?
  • somebodythere 7y ago
    Well, when you owe your broker $5,000, it's your problem. When dozens of Robinhooders owe their broker $100,000, it's Robinhood's problem. In this case, Robinhood generally applies margin calls near the end of the trading day. However, in this case, the trader's account equity went from $50,000 to -$100,000 in the span of seconds. Robinhood did in fact liquidate his position at the end of day preventing further losses, but they are already on the hook for a 6-digit sum. (Yes, legally margin debt is the trader's problem. But I doubt they will/can collect on this.)
• LandR 7y ago
  Someone has used this to turn $3000 into $1.7m now... Top post in /r/wallstreetbets From his screenshot - Margin Health GOOD ....
• Havoc 7y ago
  They had better shut this down asap. WSB has enough crazy people that'll go full YOLO
• Amygaz 7y ago
  Does anyone knows if this is a RobinHood only thing or are other brokerage-fintech vulnerable to that?
  • anonu 7y ago
    This is a bug in RH only in how they calculate loans in their account
• anonu 7y ago
  So I've said this multiple times in various forums for a while now: Robinhood is a gambling platform. The SEC should step in and treat gambling platforms like we treat casinos. There should be clear distinctions with platforms that give you Investment access and tools for your retirement. Versus video game high frequency trading.
• seanhunter 7y ago
  The fact that the app doesn't prevent you from doing this doesn't make it ok to do. It's pretty likely that borrowing and trading on the basis of nonexistent collateral is securities fraud. I'm not an expert eg I haven't even done series 7 but I did the comparable securities certification in the UK some time ago and exploiting this "glitch" to trade using leverage without real underlying collateral would almost certainly be considered fraud in the UK irrespective of whether the app allowed it. In the UK regulatory regime Robin Hood would likely also be liable for different reasons. Dealbreaker (fwiw) seems to agree with me - its strapline for this story is "Press X, Y, Down, Down, Left, Y, X for what has to be securities fraud." https://dealbreaker.com/2019/11/robinhood-has-a-securities-fraud-glitch https://dealbreaker.com/2019/11/robinhood-has-a-securities-f...