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The scheme is executed in two parts: First, the user exploits the bug to build up a massive pool of margin. Roughly, this is equivalent to taking out a $50,000

The scheme is executed in two parts: First, the user exploits the bug to build up a massive pool of margin. Roughly, this is equivalent to taking out a $50,000 loan from Robinhood Second, the user buys $50,000 of soon to expire options. Roughly, this is equivalent to pairing with another (innocent) trader, each putting up $50,000, and flipping a coin for the pot. If the user wins the coin toss, then Robinhood is fine: the user pays back the $50,000 he borrowed, keeps the $50,000 he won, and Robinhood nets some small amount of interest for their loan. However, if the user loses, Robinhood never gets back their $50,000 dollars. That money is now in the possession of the random trader who was on the other side of the coin toss, and there's no way to get it back because that trader legally won it. The user who ran the scam owes Robinhood $50,000 but that debt is close to worthless. It doesn't really matter who is responsible. Even if Robinhood prosecutes everyone who perpetuates this scheme and sends them to jail, they'll still never see their money again.

perl4ever 7y ago
"Roughly, this is equivalent to pairing with another (innocent) trader, each putting up $50,000, and flipping a coin for the pot." Seems like a better game if the other party is not so innocent, or independent...
- Zarel 7y ago
  If the other party is not so innocent, I believe that counts as market manipulation, which is highly illegal. There's not much incentive here to do that, anyway; it doesn't increase your expected value over the original coin flip.
sarah180 7y ago
RH probably won't be repaid, but they have incentives to recover here. Every state is different, but e.g., in California the median wage is about $20 / hour, and you can garnish 25% of the income above the state minimum wage of $12 / hour. That's about $4,000 / year. It's probably not worth it for RH to sue for this, but they might get back $10–15 k from a debt collection agency, which are designed to recoup debts over a period of years, all the while collecting hefty interest payments.

perl4ever 7y ago

"Roughly, this is equivalent to pairing with another (innocent) trader, each putting up $50,000, and flipping a coin for the pot." Seems like a better game if the other party is not so innocent, or independent...

Zarel 7y ago
If the other party is not so innocent, I believe that counts as market manipulation, which is highly illegal. There's not much incentive here to do that, anyway; it doesn't increase your expected value over the original coin flip.

sarah180 7y ago

RH probably won't be repaid, but they have incentives to recover here. Every state is different, but e.g., in California the median wage is about $20 / hour, and you can garnish 25% of the income above the state minimum wage of $12 / hour. That's about $4,000 / year. It's probably not worth it for RH to sue for this, but they might get back $10–15 k from a debt collection agency, which are designed to recoup debts over a period of years, all the while collecting hefty interest payments.