11 ms·

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

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).
        edoceo 7y ago
        I was just using 6 & 9 as example values from the ether (maybe Hendrix) - not in reference to any specific loan type. And yes, Prime is low today. Also, if you can make a play for real property: buy dirt. It's a good financial play to build equity/wealth.
- 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.

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).
        edoceo 7y ago
        I was just using 6 & 9 as example values from the ether (maybe Hendrix) - not in reference to any specific loan type. And yes, Prime is low today. Also, if you can make a play for real property: buy dirt. It's a good financial play to build equity/wealth.
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.