The person that posted the $1M position using $4K (<a href="https://www.reddit.com/r/wallstreetbets/comments/drqaro/robinhood_free_money_cheat_works_pretty_well_1/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drqaro/robi...</a>) hasn't said that Robinhood has shut him down yet, which is crazy to think.<p>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.<p>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.
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.
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!
I really liked this ELI5 explanation how does it work<p><a href="https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infinite_leverage_explained/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/dqg6xx/infi...</a><p>The original guy (CTN) stopped at 50k and posted the famous video where he basically lost everything but that's another story lol <a href="https://www.youtube.com/watch?v=A-tNkuYV4_Q" rel="nofollow">https://www.youtube.com/watch?v=A-tNkuYV4_Q</a><p>People were speculating that what would be the uppermost limit before Robinhood does anything and turns out you can even get $1m...
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.<p>On the other hand, if the stock tanks you will still lose, though the premiums from your options you wrote will cushion your downside.<p>The Youtube guy owned naked puts, which is far riskier than covered calls.
From the article:<p>>The problem arises when Robinhood incorrectly adds the value of those calls to the user’s own capital.<p>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.
“...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.”<p>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.)<p>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.
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.<p>Current "leaderboard":<p><a href="https://www.reddit.com/r/wallstreetbets/comments/drt5tr/guh_of_fame_2019/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drt5tr/guh_...</a><p>And an outbreak of memes on Reddit:<p><a href="https://www.reddit.com/r/wallstreetbets/comments/dr4iem/control_your_autism/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/dr4iem/cont...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this_one_is_for_the_history_books/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drxcpw/this...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_new_brokerage_war/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drsxau/the_...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_something_im_guhving_up_on_you_official_music/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/dr3eki/say_...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_light_of_todays_events_i_have_decided_to_be/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/dpwa5v/in_l...</a><p>People wondering what is Robinhood even doing, and that it's in violation of the federal law:<p><a href="https://www.reddit.com/r/wallstreetbets/comments/drmr6y/how_the_fuck_does_robinhood_exist/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drmr6y/how_...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this_sub_has_gone_to_a_new_level/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/drn8gf/this...</a><p><a href="https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robinhood_is_in_violation_of_finra_rules/" rel="nofollow">https://www.reddit.com/r/wallstreetbets/comments/dr6gus/robi...</a>
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.<p>[1]: <a href="https://www.financemagnates.com/forex/brokers/chris-saccathe-4million-negative-balance-salinger-group-twitter/" rel="nofollow">https://www.financemagnates.com/forex/brokers/chris-saccathe...</a>
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.
Makes smartphone investment product catering to unsophisticated and younger investors.<p>Makes options trading available to these customers.<p>Screws up risk management by incorrectly adding the value of those positions to customer's margin liquidity.<p>Incurs losses as a result.<p>::surprised pikachu::<p>"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.
Chris Sacca (legendary VC) exploited a similar bug in his early days.<p><a href="https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick_&_West" rel="nofollow">https://en.wikipedia.org/wiki/Chris_Sacca#Stocks_and_Fenwick...</a><p>> 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]
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.<p>What is the advantage of Robinhood over ETrade at this point?
If you have any amount of money or equity held by Robinhood, you should seriously consider moving it to another broker.<p>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).
Someone on reddit posted this, which makes it seem like Robinhood support is actually ok with the strategy: <a href="https://m.imgur.com/a/g4tpH9y" rel="nofollow">https://m.imgur.com/a/g4tpH9y</a><p>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
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.<p>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.<p>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."<p><a href="https://dealbreaker.com/2019/11/robinhood-has-a-securities-fraud-glitch" rel="nofollow">https://dealbreaker.com/2019/11/robinhood-has-a-securities-f...</a>
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?
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:<p><a href="https://www.crunchbase.com/organization/robinhood/current_employees/current_employees_image_list" rel="nofollow">https://www.crunchbase.com/organization/robinhood/current_em...</a><p>(backup image: <a href="https://i.imgur.com/tEx7uT8.png" rel="nofollow">https://i.imgur.com/tEx7uT8.png</a>)<p>"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.
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.
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.
Why doesn't Robinhood just close the positions?<p>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.<p>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.
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.
The GUH heard ‘round the world.<p>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.
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?
These are the assets that your Robinhood checking account is giving you (with SIPC).<p>Aka, another bank.<p>Why the SIPC allows them to run a half-baked investment bank providing free leverage to all is I guess the real mystery here.
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?
(I also posted this on /r/wallstreetbets)<p>CLEARLY, Robinhood knows about the infinite leverage bug, they have the capital, resources and engineers to fix it in a day if they want.<p>Why are they not doing it? Are they stupid or what? Let's think about it for a second.<p>There are two possible outcomes here:<p>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$<p>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.<p>If I was Robinhood CEO, that's what I would do, a 100% legal, safe way to get rich quickly.<p>Prove me wrong.