
Robinhood Traders Discovered a Glitch That Gave Them ‘Infinite Leverage’ - galeos
http://www.bloomberg.com/news/articles/2019-11-05/robinhood-has-a-glitch-that-gives-traders-infinite-leverage
======
tempsy
The person that posted the $1M position using $4K
([https://www.reddit.com/r/wallstreetbets/comments/drqaro/robi...](https://www.reddit.com/r/wallstreetbets/comments/drqaro/robinhood_free_money_cheat_works_pretty_well_1/))
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.

~~~
aristophenes
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".

~~~
jklinger410
>If it goes on too long, Robinhood becomes insolvent because they absorb the
losses but pass the winnings on to their customers.

Companies rarely absorb losses due to "abuse" by their users. Even when it is
entirely the fault of the corp. I'm sure they have small print somewhere that
absolves them of all responsibility for trades that do not meet some arbitrary
guidelines.

It would likely require a class action lawsuit by the users, and get dragged
out for years. They have more to worry about from the SEC on this then paying
their users, if history is a predictor for this.

~~~
zajd
Where exactly do you think the money is going to come from? These people are
taking $2k and making trades that are losing $500k. They never had $500k.
Robinhood is still out of that money, regardless of their guilt or whether
they are convicted/sued/etc. There is no money to chase after. That's why this
sort of thing is so insane.

~~~
ryandrake
What happens in a normal brokerage when someone, despite the brokerage’s risk
management checks, manages to get a margin deficiency that they cannot
possibly rectify by liquidating their holdings or depositing cash? Serious
non-rhetorical question, I have no idea...

~~~
kasey_junk
The more interesting question here is what Robinhood’s clearing house is
exposed to. It’s been a while since I looked but they don’t clear themselves
and the clearing house may have had exposure.

If that’s the case you can expect the relationship to change. Robinhood will
either lose some capabilities or will pay more for clearing.

~~~
aristophenes
Looks like Robinhood is now Robinhood's clearing broker:
[https://robinhood.com/support/articles/360001397126/whats-
cl...](https://robinhood.com/support/articles/360001397126/whats-clearing-by-
robinhood/)

------
jddj
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
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
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
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
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.

------
eigenvalue
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!

~~~
superfrank
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.

~~~
ryandrake
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?

~~~
mikestew
There is no requirement that you understand anything except how to check that
checkbox that says, “yeah, yeah, I promise I read the PDF you sent. Let me
trade da options!!!”

~~~
perl4ever
Some brokers have different levels of option trading privileges, and require
you to attest to a certain amount of experience to get to the highest.

I'm not sure if there are any consequences to lying about your experience, but
in principle, you are claiming certain facts in writing, not just saying you
read a disclaimer or educational material.

------
bdz
I really liked this ELI5 explanation how does it work

[https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infi...](https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infinite_leverage_explained/)

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...

~~~
Redoubts
What the hell was this guys APPL position, and why did he not know what would
happen long before market open?

~~~
1-more
Also he picked his position because he thought apple was overvalued due to
having too many female execs. Even if we concede his point, that should be
priced into the stock already, no?

~~~
pnako
It may be priced in the stock if other traders have the same logic.

If you think it's a good investment thesis, a better strategy would be to
build a portfolio where you go long on a basket of stocks with "not too many
female execs" and another, offsetting, short basket of stocks with "too many
female execs". If you do that properly, you should be able to almost entirely
eliminate market and industry risk and basically "amplify" your investment
thesis.

~~~
qeternity
This is what a hedge fund originally was (now usually referred to as long
short equity funds). Relative value trading. A lost art in our current central
bank driven markets.

------
tempsy
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
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
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
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.

~~~
0898
A 2% profit with a 5% chance of going busto doesn’t sound like a super smart
trade, unless I’m missing something.

~~~
kgwgk
95% probability of winning 2% of $1mn = $20k

5% probability of losing $4k

Not so bad (if you can get away with it).

------
brobinson
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
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
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
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.

~~~
semiotagonal
That probably would help. I _think_ a properly functioning margin system would
never result in negative balances on liquidation, as long as the fake
executions were filled at exactly the trigger price. Doing crazy but valid
shit and looking for negative balances would probably catch other issues too.

------
webninja
“...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.

~~~
u10
it's their own damn fault. Turns out "Move fast and break things" doesn't
necessarily apply to all industries.

------
H8crilA
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_...](https://www.reddit.com/r/wallstreetbets/comments/drt5tr/guh_of_fame_2019/)

And an outbreak of memes on Reddit:

[https://www.reddit.com/r/wallstreetbets/comments/dr4iem/cont...](https://www.reddit.com/r/wallstreetbets/comments/dr4iem/control_your_autism/)

[https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this...](https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this_one_is_for_the_history_books/)

[https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_...](https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_new_brokerage_war/)

[https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_...](https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_something_im_guhving_up_on_you_official_music/)

[https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_l...](https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_light_of_todays_events_i_have_decided_to_be/)

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_...](https://www.reddit.com/r/wallstreetbets/comments/drmr6y/how_the_fuck_does_robinhood_exist/)

[https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this...](https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this_sub_has_gone_to_a_new_level/)

[https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robi...](https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robinhood_is_in_violation_of_finra_rules/)

~~~
tomp
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!

------
divbzero
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...](https://www.financemagnates.com/forex/brokers/chris-
saccathe-4million-negative-balance-salinger-group-twitter/)

~~~
HanayamaTriplet
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-
stud...](https://pando.com/2012/11/01/how-chris-sacca-turned-his-student-
loans-into-12-million-and-then-lost-it-all/)

------
abhisuri97
Of course /r/WallStreetBets did this.

------
hammock
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.

------
jdlyga
I know basically nothing about finance. But /r/wallstreetbets is endlessly
entertaining.

~~~
skizm
> I know basically nothing about finance.

Neither does anyone on r/wsb, which is why it is entertaining.

~~~
adrr
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
For reference, Bloomberg terminal costs $24,000 per year.

------
synaesthesisx
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
I'm just waiting for Bloomberg to add haupt91 videos on the front page.

------
nullc
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.

------
rebuilder
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
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
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.

------
zelly
Chris Sacca (legendary VC) exploited a similar bug in his early days.

[https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick...](https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick_&_West)

> 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]

------
jedberg
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
>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.

------
tenpies
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).

~~~
jakenberg
Just because RH is in legal/regulatory trouble does not mean your money is
just going to disappear. It's a fiduciary, not an ICO. Financial firms must
have disaster plans that involve giving or transferring all of your assets
back to you if it all ends. Selling your positions because of this would be a
misinformed decision.

~~~
tenpies
> Selling your positions because of this would be a misinformed decision.

That is why I specified moving. That should not be parsed as "sell
everything".

My concern would not be losing my money/positions. My concern is Robinhood
losing its license and then being stuck on a comically long cue while they
hire 5 under-motivated temps to handle hundred of thousands of account
transfers. Their customer support is already terrible now. I can only imagine
what that incompetence + financial collapse + end of operations would look
like.

I am assuming the prospect of being locked out of your accounts for several
weeks/months would be stressful, not to mention the monumental task that may
be involved in getting certain records back in place for tax season.

~~~
jakenberg
I worked at a fiduciary that went down so feel confident speaking to this.
You're still not getting it. It's not like other startups that fail where you
just get some temps and hope it solves itself. You have a specific timetable
from the moment you lose your license to transferring every cent out. Past
that window, there are penalties and further legal problems with the SEC. It's
safe to say anybody – even slimy companies – are in full overdrive as this is
going down.

ACAT is not that simple. Most brokerages charge you a fee of upwards of $50 to
do it. If the brokerage is going down and they must invoke an ACAT for you,
they eat the fee. Again, it's misinformed to be incurring charges and even
potentially taxable events because of your philosophical beliefs in the
success or failure of a company.

------
opportune
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
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
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
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.

~~~
Itsdijital
You ever use RH? It's been hard to take them seriously since day 1.

------
cascom
these people should just trade futures - you can buy a treasury bond future at
effectively ~70x leverage without trying to defraud your broker...

~~~
eigenvalue
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
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
What happened in your case? Did you have to pay back the loan or were you able
to walk away from it?

~~~
sitzkrieg
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

~~~
hpkuarg
What did you switch to, IB?

~~~
sitzkrieg
nah, a smaller boutique ish futures broker. IB has excellent order execution
and absolutely horrible market data, but i used to use IB with CQG data until
they instituted a monthly fee to accounts with high risk positions in (i had a
small amount of naked puts, but the fee easily became substantial). i do
recommend them if you dont write naked puts etc and dont day trade or use
other data

------
seanhunter
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-f...](https://dealbreaker.com/2019/11/robinhood-has-a-securities-
fraud-glitch)

------
oarabbus_
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
As someone posted elsewhere, you are fine:
[https://www.investopedia.com/articles/investing/050515/what-...](https://www.investopedia.com/articles/investing/050515/what-
happens-when-stock-broker-goes-bust.asp)

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)

------
neonate
[https://outline.com/sCeKc7](https://outline.com/sCeKc7)

~~~
Cub3
Didn't know this service existed, how do they not get taken down for rehosting
content without permission?

------
LandR
Someone has used this to turn $3000 into $1.7m now...

Top post in /r/wallstreetbets

From his screenshot - Margin Health GOOD ....

------
tpmx
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_em...](https://www.crunchbase.com/organization/robinhood/current_employees/current_employees_image_list)

(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.

------
gatherhunterer
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.

------
rdlecler1
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.

~~~
hogFeast
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.

~~~
salawat
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.

------
djfergus
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.

------
anonu
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.

------
imroot
I think this will be the third time Robinhood has to address something that
happened by way of /r/wallstreetbets...

------
ganitarashid
Now that trades are free everywhere, nothing sets apart Robinhood anymore.
Robinhood may yet become the next WeWork.

~~~
missedthecue
No one else offers free options trades aside from RH

~~~
perl4ever
Considering the size of the spread on most options, why would you focus on
commissions?

------
Havoc
They had better shut this down asap. WSB has enough crazy people that'll go
full YOLO

------
mv4
Wow. And I thought this (amateurs building financial systems) only happened in
crypto.

Just wow.

------
rm_-rf_slash
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.

------
dingdongding
This is perfect for their name. Passing money from rich (VCs) to poor people

~~~
perl4ever
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.

------
jyriand
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
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.)

------
thedudeabides5
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.

------
Amygaz
Does anyone knows if this is a RobinHood only thing or are other brokerage-
fintech vulnerable to that?

~~~
anonu
This is a bug in RH only in how they calculate loans in their account

------
gbronner
Quote of the day from the reddit discussion:

Just block margin so she can't call you.

~~~
mc3
Just call her Margo.

------
blhack
How is this not fraud?

~~~
mc3
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
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
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.

------
jsf01
The new high score is $1.7mil. Bloomberg can’t keep up!

------
NoblePublius
How does this company still have a BD license?

------
wyxuan
Robin Hood said this behavior is okay

------
mrbonner
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
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).

------
seffignoz
(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.

~~~
rbavocadotree
What you've described is a very quick way to lose your broker dealers license,
and get in massive shit from multiple federal agencies, not a safe way to get
rich.

> CLEARLY, Robinhood knows about the infinite leverage bug

This is the same company that offered FDIC insured savings and checking
accounts, while not actually being covered by FDIC. They have always taken a
move fast a break things approach, and then had to cover their asses when
regulators step in.

~~~
chipsa
SIPC insured.

