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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

by 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.
  - hinkley 7y ago
    I was taught that some aspects of that rule go back to the stock market crash of ‘29. There were few limits on leverage then, either.
    - hermitdev 7y ago
      This correct. My knowledge comes from +15 years working in finance. I dont know the individual limit on leverage, bit its fairly low. Institutionally is another story. I was working at a fairly large hedge fund through the 2008 collapse that saw a huge loss due to a 40:1 leverage. Nearly bankrupted the firm. Through September and October, the lot of us working there thought we were doomed and were awaiting the layoffs that never came. As a result, the firm put in a self imposed leverage limit of 10:1 amd divested itself of less liquid assets like bank loans. We held around $20B USD in bank debt that was toxic and couldnt find a market for. No bailout, but something like 60% of $24B USD evaporated in a month. It was all made back in about 18-24 months, though. Crazy times...
      - lostlogin 7y ago
        Is your full story written up somewhere?
- tptacek 7y ago
  I have no idea if SEC guidelines limit the amount of unsecured buying power offered to consumers but it does not follow from any such stipulated guideline that a bug in an order entry system shifts liability to RH from its customers. All applications – including other order entry systems – have bugs like these.
  - Galanwe 7y ago
    Most regulatory organizations such as SEC enforce "means", rather than "results". In simple terms: You will not have problems if a bug happens, as long as you can show that you had a reasonable, best of your knowledge, process to avoid bugs (code review, staging changes, fallback plans, regular analysis/checks, etc). This does not seem to be the case for RH unfortunately. They will have to explain why the detection / escalation failed for this issue, why no statements were provided, why it was not spotted by internal analytics/checks, why the pre-trade checks let these trades go, etc. They will probably end up with a huge fine. Disclaimer: I work in a hedge fund that is SFC regulated. I expect the SEC to have pretty much the same policies.
- LegitShady 7y ago
  It sure is. In The Reddit thread on wallstreetbets someone already submitted an official complaint because you get a commission!
aristophenes 7y ago
Yes, that this bug has existed so long after it was used and publicized is scary. If it goes on too long, Robinhood becomes insolvent because they absorb the losses but pass the winnings on to their customers. Which leads me to believe this has already happened and Robinhood is falling apart organizationally as they realize they don't have enough money to cash everyone out. Which in turn means they need to keep it quiet or else there will be a "run on the bank".
- aristophenes 7y ago
  Taking this line of thinking a bit further, they may have been trying to get more money from investors, and if they haven't already, now these stories are out they might not be able to. So I wouldn't be surprised if Robinhood freezes all accounts over the next week, and the SIPC gets involved. What SIPC does: https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/what-sipc-protects And thankfully Robinhood Financial LLC of Menlo Park CA is a member: https://www.sipc.org/list-of-members/R https://www.sipc.org/list-of-members/R I would assume there is almost no one with over $500,000 using Robinhood, but if so, you better get your money out now.
  - mrep 7y ago
    They just raised 50 million dollars a week ago according to crunchbase [0] and I doubt they have blown through that already. [0]: https://www.crunchbase.com/funding_round/robinhood-series-e--6fdfff2a https://www.crunchbase.com/funding_round/robinhood-series-e-...
    - dkural 7y ago
      It takes only 50 customers like the guy above to loose their money to some ill-conceived put option.
      - drspacemonkey 7y ago
        Considering the posters of /r/wallstreetbets have a leader board going to see who can glitch the most leverage, it's well within the realm of possibility https://old.reddit.com/r/wallstreetbets/comments/drt5tr/guh_of_fame_2019/ https://old.reddit.com/r/wallstreetbets/comments/drt5tr/guh_...
tptacek 7y ago
I don't understand why this would be at all difficult for RH to go after. It's clearly fraud. The WallStreetBets top comments seem to have this pretty much dialed in: the best case is that RH unwinds the profits you make; the worst case is, well, much worse.
- rebuilder 7y ago
  Because RH is on the hook, immediately, for any losses their users may have incurred. Any reparations they might get from their users would have to be collected individually, through a lengthy legal process, from people who are likely unable to pay.
- patio11 7y ago
  I wonder if they can actually bust the trades here? That feels unlikely to me. (I don’t know enough about contractual remedies to speculate on whether they can just keep the money in the “flip lands in user’s favor” case.) Peanut gallery: “Bust trade” has a technical meaning, to tell the counterparty that the trade was in error and pretend it never happened. There are limited circumstances where this is possible. This is different from e.g. “We’re force liquidating these positions.”
  - rednixion 7y ago
    No chance at this point, traders might have a non-zero risk of a fraud charge of some sort since they are purposefully misrepresenting the value of their account in order to get credit but RH is going to get stuck with the vast majority of the bill.
  - seanhunter 7y ago
    I think a broker or marketmaker has in the order of minutes to bust a trade that is "clearly erroneous" and it has to be immediately reported. The exact time period varies by exchange but for example for nasdaq it's 30mins for some trades and 60mins for others https://nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous https://nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous For the exchanges I'm more familiar with (in Europe) it's less. The criteria for clearly erroneous trades are incorrect price, size or security though so I don't think this would qualify. Most likely scenario here is that there is an investigation into fraud and that any gains here get forfeit but users are still required to make good any losses. Separately I would expect RobinHood gets a hefty fine as well.
ineedasername 7y ago
I don't know, they shouldn't sue them simply for taking advantage of the exploit, these users did knowingly take on leverage by borrowing money to do so. The standard practice when taking on leverage is that you owe the money one way or another. Saying that Robinhood wouldn't have want to give them that leverage, but did give it to them, doesn't really change the legal obligation to make good on a debt willingly and knowingly incurred.
- birdyrooster 7y ago
  Exactly, these folks will be waiting 7 years for their credit to not be obliterated and maybe they might have to wait for some of that in federal prison. What the heck are they thinking?
- zelly 7y ago
  People at the Department of Justice are archiving all these reddit posts. It's pure self-incrimination. The screenshots can be easily tied back to their Robinhood accounts. They won't be getting any easy plea deals. It's a question of whether Robinhood will press charges or not.
  - rwmurrayVT 7y ago
    You always get a plea deal. It's just the terms won't be as favorable.
  - ineedasername 7y ago
    What would that charges be though? What crime is broken when a trader takes on debt that Robinhood inadvertently allowed?
zelly 7y ago
I withdrew all cash from Robinhood and urged everyone to do the same. Funds are not safe. Brokerage accounts are insured by SIPC (similar to FDIC), but you don't want to wait N months to get reimbursed after whatever lengthy court battles are about to go down.
- AznHisoka 7y ago
  Withdrawing cash is the easy part. Moving the stocks to another brokerage seems like a pain. and I fed don’t want to liquidate my positions for tax purposes
  - seanhunter 7y ago
    If you're a US person, I don't think you need to liquidate anything - you can request an ACATS transfer and your securities will be moved directly into your new brokerage account. This is a service run by the NSCC so I think would apply to all brokerage firms.
notus 7y ago
If someone commits securities fraud I don't think robinhood is the one who has to take them to court, isn't that handled by third parties that will involve themselves regardless of whether or not robinhood wants them to?

by tempsy 7y ago

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.
- hinkley 7y ago
  I was taught that some aspects of that rule go back to the stock market crash of ‘29. There were few limits on leverage then, either.
  - hermitdev 7y ago
    This correct. My knowledge comes from +15 years working in finance. I dont know the individual limit on leverage, bit its fairly low. Institutionally is another story. I was working at a fairly large hedge fund through the 2008 collapse that saw a huge loss due to a 40:1 leverage. Nearly bankrupted the firm. Through September and October, the lot of us working there thought we were doomed and were awaiting the layoffs that never came. As a result, the firm put in a self imposed leverage limit of 10:1 amd divested itself of less liquid assets like bank loans. We held around $20B USD in bank debt that was toxic and couldnt find a market for. No bailout, but something like 60% of $24B USD evaporated in a month. It was all made back in about 18-24 months, though. Crazy times...
    - lostlogin 7y ago
      Is your full story written up somewhere?
tptacek 7y ago
I have no idea if SEC guidelines limit the amount of unsecured buying power offered to consumers but it does not follow from any such stipulated guideline that a bug in an order entry system shifts liability to RH from its customers. All applications – including other order entry systems – have bugs like these.
- Galanwe 7y ago
  Most regulatory organizations such as SEC enforce "means", rather than "results". In simple terms: You will not have problems if a bug happens, as long as you can show that you had a reasonable, best of your knowledge, process to avoid bugs (code review, staging changes, fallback plans, regular analysis/checks, etc). This does not seem to be the case for RH unfortunately. They will have to explain why the detection / escalation failed for this issue, why no statements were provided, why it was not spotted by internal analytics/checks, why the pre-trade checks let these trades go, etc. They will probably end up with a huge fine. Disclaimer: I work in a hedge fund that is SFC regulated. I expect the SEC to have pretty much the same policies.
LegitShady 7y ago
It sure is. In The Reddit thread on wallstreetbets someone already submitted an official complaint because you get a commission!

aristophenes 7y ago

Yes, that this bug has existed so long after it was used and publicized is scary. If it goes on too long, Robinhood becomes insolvent because they absorb the losses but pass the winnings on to their customers. Which leads me to believe this has already happened and Robinhood is falling apart organizationally as they realize they don't have enough money to cash everyone out. Which in turn means they need to keep it quiet or else there will be a "run on the bank".

aristophenes 7y ago
Taking this line of thinking a bit further, they may have been trying to get more money from investors, and if they haven't already, now these stories are out they might not be able to. So I wouldn't be surprised if Robinhood freezes all accounts over the next week, and the SIPC gets involved. What SIPC does: https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/what-sipc-protects And thankfully Robinhood Financial LLC of Menlo Park CA is a member: https://www.sipc.org/list-of-members/R https://www.sipc.org/list-of-members/R I would assume there is almost no one with over $500,000 using Robinhood, but if so, you better get your money out now.
- mrep 7y ago
  They just raised 50 million dollars a week ago according to crunchbase [0] and I doubt they have blown through that already. [0]: https://www.crunchbase.com/funding_round/robinhood-series-e--6fdfff2a https://www.crunchbase.com/funding_round/robinhood-series-e-...
  - dkural 7y ago
    It takes only 50 customers like the guy above to loose their money to some ill-conceived put option.
    - drspacemonkey 7y ago
      Considering the posters of /r/wallstreetbets have a leader board going to see who can glitch the most leverage, it's well within the realm of possibility https://old.reddit.com/r/wallstreetbets/comments/drt5tr/guh_of_fame_2019/ https://old.reddit.com/r/wallstreetbets/comments/drt5tr/guh_...

tptacek 7y ago

I don't understand why this would be at all difficult for RH to go after. It's clearly fraud. The WallStreetBets top comments seem to have this pretty much dialed in: the best case is that RH unwinds the profits you make; the worst case is, well, much worse.

rebuilder 7y ago
Because RH is on the hook, immediately, for any losses their users may have incurred. Any reparations they might get from their users would have to be collected individually, through a lengthy legal process, from people who are likely unable to pay.
patio11 7y ago
I wonder if they can actually bust the trades here? That feels unlikely to me. (I don’t know enough about contractual remedies to speculate on whether they can just keep the money in the “flip lands in user’s favor” case.) Peanut gallery: “Bust trade” has a technical meaning, to tell the counterparty that the trade was in error and pretend it never happened. There are limited circumstances where this is possible. This is different from e.g. “We’re force liquidating these positions.”
- rednixion 7y ago
  No chance at this point, traders might have a non-zero risk of a fraud charge of some sort since they are purposefully misrepresenting the value of their account in order to get credit but RH is going to get stuck with the vast majority of the bill.
- seanhunter 7y ago
  I think a broker or marketmaker has in the order of minutes to bust a trade that is "clearly erroneous" and it has to be immediately reported. The exact time period varies by exchange but for example for nasdaq it's 30mins for some trades and 60mins for others https://nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous https://nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous For the exchanges I'm more familiar with (in Europe) it's less. The criteria for clearly erroneous trades are incorrect price, size or security though so I don't think this would qualify. Most likely scenario here is that there is an investigation into fraud and that any gains here get forfeit but users are still required to make good any losses. Separately I would expect RobinHood gets a hefty fine as well.

ineedasername 7y ago

I don't know, they shouldn't sue them simply for taking advantage of the exploit, these users did knowingly take on leverage by borrowing money to do so. The standard practice when taking on leverage is that you owe the money one way or another. Saying that Robinhood wouldn't have want to give them that leverage, but did give it to them, doesn't really change the legal obligation to make good on a debt willingly and knowingly incurred.

birdyrooster 7y ago
Exactly, these folks will be waiting 7 years for their credit to not be obliterated and maybe they might have to wait for some of that in federal prison. What the heck are they thinking?
zelly 7y ago
People at the Department of Justice are archiving all these reddit posts. It's pure self-incrimination. The screenshots can be easily tied back to their Robinhood accounts. They won't be getting any easy plea deals. It's a question of whether Robinhood will press charges or not.
- rwmurrayVT 7y ago
  You always get a plea deal. It's just the terms won't be as favorable.
- ineedasername 7y ago
  What would that charges be though? What crime is broken when a trader takes on debt that Robinhood inadvertently allowed?

zelly 7y ago

I withdrew all cash from Robinhood and urged everyone to do the same. Funds are not safe. Brokerage accounts are insured by SIPC (similar to FDIC), but you don't want to wait N months to get reimbursed after whatever lengthy court battles are about to go down.

AznHisoka 7y ago
Withdrawing cash is the easy part. Moving the stocks to another brokerage seems like a pain. and I fed don’t want to liquidate my positions for tax purposes
- seanhunter 7y ago
  If you're a US person, I don't think you need to liquidate anything - you can request an ACATS transfer and your securities will be moved directly into your new brokerage account. This is a service run by the NSCC so I think would apply to all brokerage firms.

notus 7y ago

If someone commits securities fraud I don't think robinhood is the one who has to take them to court, isn't that handled by third parties that will involve themselves regardless of whether or not robinhood wants them to?