A Glitch in Robinhood App is Allowing Users To Trade Stocks With Excess Borrowed Funds, Giving Them Access To What Amounts To Free Money (bloomberg.com) 68
Dubbed the "infinite money cheat code" by users of Reddit's WallStreetBets forum, the bug is being exploited, according to users on the forum. One trader bragged about a $1 million position funded by a $4,000 deposit. From a report: Robinhood is "aware of the isolated situations and communicating directly with customers," spokesperson Lavinia Chirico said in an email response to questions. The Menlo Park, California-based money-management software designer touts trading "free from commission fees." Robinhood Gold customers are invited to "supercharge" their investing by paying $5 a month to trade on margin, or money borrowed from the company. Here's how the trade works. Users of Robinhood Gold are selling covered calls using money borrowed from Robinhood. Nothing wrong with that. The problem arises when Robinhood incorrectly adds the value of those calls to the user's own capital. And that means that the more money a user borrows, the more money Robinhood will lend them for future trading. One trader managed to turn his $2,000 deposit into $50,000 worth of purchasing power, which he used to buy Apple puts.
blockchain... (Score:3)
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sure ... but if you can get it in the cloud and offer as SaaS
This is why we can't have nice things. (Score:2)
Re:This is why we can't have nice things. (Score:5, Informative)
Yes, anybody can review the history of the Stock Market Crash of 1929 and see that trading on margin had a huge influence on destabilizing the market.
Trading on margin creates a false sense of security and exposes people to a very steep downside:
Over the weekend, the events were covered by the newspapers across the United States. On October 28, "Black Monday", more investors facing margin calls decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38.33 points, or 13 percent. [wikipedia.org]
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Unfortunately it also the only way any normal person will be able to access the kind of funds required to be exposed to potential steep upside. Turning $100k into a million in less than 15 years without utilizing margin, never going to happen even all your positions are winners.
Re:This is why we can't have nice things. (Score:4, Insightful)
Turning $amount in 10x$amount over 15 years riding the stock market, can realistically happen in one (or a combination of) two ways:
There is some natural growth of the economy that's reflected in the stock market, but it is not nearly enough to tenfold an investment on average over 15 years.
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"* at the expense of other participants"
Of course it comes at the expense of other participants. It is a competition. Most people lose money in the market, all gains come at the expense of those who lose. It is the entire point. Generally speaking, higher gains come at higher risk. By assuming a greater risk of losing your funds you get a greater reward relative to your investment.
"There is some natural growth of the economy that's reflected in the stock market, but it is not nearly enough to tenfold an inv
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Yes, that is called gambling.
For someone to win 10x (excepting inflation, and natural growth), 9 other people have to lose all.
If you consider yourself lucky, then by all means. However people should not cry when they inevitably lose all their savings.
That is why I believe these kind of activities should be regulated, or at least come with proper warning and maybe a small training session to let people know what they are going into.
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"Yes, that is called gambling."
What you are describing is gambling as well. The economy isn't necessarily going to grow. People investing in real estate didn't think they were gambling until the market went down.
Everything is gambling. Even a job carries a risk of losing your job or not getting paid. You are betting your time (a resource you can never make up) you will get paid and have a consistent income stream. You have the imaginary stability of a consistent paycheck while your employer faces the unstab
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There is risk, and there is excessive risk. Just because everything in life is risky does not mean everything is in the same category.
For example, Russian roulette is a risk that is at the extreme end of the spectrum.
And investing in IBM stock is near the other end (there is little upside though).
The main indicator, for me, is whether it is a "win-win" arrangement, or a "win-lose" one. If you short stock, someone needs to lose money, there is no way around that. If you invest in a stock, you can win or lose
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"For example, Russian roulette is a risk that is at the extreme end of the spectrum.
And investing in IBM stock is near the other end (there is little upside though)."
Tell it to those who jumped out windows after stock market crashes or losing their positions. Everyone has the right to determine their own tolerance to risk. If that game of Russian roulette was with Hitler, or Stalin, or the person holding your child hostage, you might decide the potential value gained should you win is worth the risk. Even i
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It most certainly is the way most people lose all their assets, ohh man, that unlimited liability, you have to pay what ever it costs to clear your debt.
The big financial houses play mug punters on puts and shorts, they big financial houses have the numbers, they know exactly when to cripple those puts and shorts, when the buy the opposite way and force those trades as the price is pushed in the direction they want to vulture their own investors, to target them to wipe them out, done on purpose.
They might
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Yup and and 25x or greater leverage is extreme volatile. It isn't like they'll get to ride it and "wait for it to come back" they'll see a margin call and that margin call will force close their positions at heavy loss.
So yeah, it's extreme risk. With great risk comes great potential reward, if the trades go their way I see no reason they aren't entitled to the result.
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why a normal person would need to play the lottery like that though? you can be exposed to a deep upside or such a deep downside that you can't get back up(which makes it so that you cannot ever recover, which makes it so risky it's stupid), which makes a single one of those downsides so bad you can't get back up which is why traders jumped out of windows.
with high enough margins you can lose the original 100k in the daily swings and once you've lost it, it's gone - not just like 10% of it gone, but 100% o
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"why a normal person would need to play the lottery like that though? you can be exposed to a deep upside or such a deep downside that you can't get back up(which makes it so that you cannot ever recover, which makes it so risky it's stupid), which makes a single one of those downsides so bad you can't get back up which is why traders jumped out of windows."
I didn't say it was a smart trade. But the reason a normal person would do it is that if you ever want to move from middle class to the investment class
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4k of actual money put in and a 1 million position? it goes down just 1% and you're already 6k in the red in debt
If I was in my early 20s and someone said, "Take a 4k loan, and gamble it at even odds. If you win, you're an instant millionaire, if you lose you'll need to declare bankrupt."
That's very enticing.
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At even odds? I don't know where you are going to find that. Roughly 70% of positions lose money in the market. That is where the gains come from. Outside initial public offerings, stock buybacks, and some older companies who pay dividends the money doesn't come from or directly impact the underlying company though it generally does impact the board and executives who personally have lots of stock.
Here is the thing. You could have done that in your 20's with risky trades in the market or business or a numbe
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Margin is massively useful to be able to trade freely when you want to without being limited by settling times that limit you to trading about once per week in practice, with a single lump of money.
You can trade freely, recycling the same money multiple times a day, while never actually borrowing anything.
One downside is that with a large margin multiplier (I can buy 4X my cash balance, borrowing on margin), a slip of an extra 0 on the purchase will go through without warning, and you end up buying 10 times
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History lessons, anyone? (Score:3)
People, please, excessive margin trading caused the crash of 1929 and resulting Great Depression.
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Yes, and this will be reversed in whole, the ones who exploited it will be sued and thrown in prison, and it will all blow over.
What crime did those that exploited it commit? The company itself was backing their leveraged positions.
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It all depends, did they post on the internet bragging that they took advantage of what they believed was a bug?
If they exercised discretion, or just generally didn't discuss the details of their finances with strangers, then yeah, they probably didn't do anything that was "wrong" in an enforceable way.
But if they believed it was a bug and documented that belief, then it might be fraud. They should hire criminal defense lawyers immediately.
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The crime of making government and certain institutions look bad is enough to get your ass in jail.
Almost everywhere you go, you have likely broken a law that can be used to make an example out of you. And no... people like you won't care either. But you will pretend that you do!
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Using money that they know they are gaining access to through abuse, and they know doesn't legally belong to them, is theft. Using a computer system to steal that money turns them legally speaking into hackers, and brings on additional charges for computer fraud. They should be giving their lawyers a heads up rather tha
securities fraud as well (Score:2)
better get a good lawyer
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Not a legal export here but my guess is the question will turn on "did he reasonably believe Robinhood Gold considered those covered contracts to be marginable securities themselves. Given his posts - no he did not think that, he thought it was programing error and exploited it. I doubt the law will be sympathetic to him.
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Is it theft, or just simple fraud?
I'm a bit hazy on the law in that area.
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When the company itself goes under you will find it's all the people who had accounts with them that are backing those positions. The broker is liable, and that includes ALL of their assets, traded or not. As someone who has traded extensively I know that margin is only a good thing when it works. It doesn't always work. My brother lost money when a sudden dip (and bounce-back) of the Euro wiped out his broker who were caught with their pants down. The Euro bounced back to normal levels, which doesn't chang
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Has the lawsuit been settled and in his favor? Honestly it sounds like he simple got hit with a margin call. Which the brokerage is generally within their rights to do. You only get to play with house money as long as the broker thinks you are going to either win or can sustain the losses and return the cash. The moment they don't think they have the right to liquidate the leveraged assets and make themselves whole. In a lot of cases they don't even have to extend the courtesy of asking you what assets
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This is why I never leave sizeable cash amounts in accounts that I don't explicitly own.
A broker doesn't hold my cash in their account. Some organisations hold sums for me but it's held in my name under their control, not under their name. It's not their cash and they can't use it to settle their own commitments.
It's a shame for your brother but he should have avoided that situation from the outset.
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When the company itself goes under you will find it's all the people who had accounts with them that are backing those positions.
Now would be the time to move away from robinhood before they collapse from this practice. Innocent people using this service are going to crash and burn alongside those abusing the service.
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What crime did those that exploited it commit? The company itself was backing their leveraged positions.
You know the Enron CFO was tossed in jail not because he violated any laws but because the way he pursued loopholes was so gratuitously malicious?
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What crime did those that exploited it commit? The company itself was backing their leveraged positions.
Doesn't matter. You trade securities, you're bound by securities laws. It's up to you to understand them and comply. And if you lose money on margin and can't cover it, there's no bankruptcy protection at all. They can take your house, they can take the clothes you're wearing, they can take your wheelchair, they can probably take your insulin and your heart medication if they want to.
Your broker is supposed to protect you from getting too stupid on margin, but if your broker fails, that just means you'r
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No it didn't. Very few people owned stocks compared to today, and an even smaller amount of those did excessive margin trading. The gold standard, tariffs, and in particular the Dust Bowl cause the Great Depression.
You forgot how it was prolonged by FDR. He was trying but pushing hard in the wrong direction doesn't help no matter how well intentioned you are. It was his pressure that allowed the interstate commerce clause to become abused so that the Feds can do virtually anything they want in the name of 'interstate commerce'.
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People, please, excessive margin trading caused the crash of 1929 and resulting Great Depression.
Which is why there are regulations now to limit how much margin vs capital that a broker can extend. Regulations that, intentional or not, Robinhood broke.
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Re:TANSTAAFL (Score:2)
In other words the same power as banks (Score:3)
Re:In other words the same power as banks (Score:4, Interesting)
The famous "British bankers PDF" release a number of years back explained it all clearly.
The reserve requirements are meaningless to banks. Deposits are not assets, they're liabilities. Outstanding loans are not liabilities, those are assets. Overall there is an excess of deposits compared to loans. The rules of the system are written to make it appear that loans are limited by deposits, but because banks holding deposits can trade the reserve value of those deposits to other banks, there isn't any shortage of reserve deposits. That means that the deposits held don't actually present any limit on loans. Instead, the limiting factor is merely how many loans they can get borrowers to accept!
You're imagining shady "off-balance" transactions where there isn't even any need for them to cheat. They can trade reserve requirements above the board, they don't have to sneak around to do that. They already have "unlimited" amounts of available leverage, because of the design of the financial markets. They simply write the rules to be phrased as if the bottleneck is inverted. There is a surplus of liquid assets available to borrow, and there is a shortage of people willing to take on all the available risk associated with borrowing it. This is exactly why "sub-prime loans" are something that the industry is perpetually at risk of issuing too many of! If loans were limited by reserves, the banks would naturally be highly averse to sub-prime loans. It is only because there is a surplus of deposits that there is a surplus of available credit and the naturally resulting moral hazard and credit boom/bust cycles.
There is absolutely no need for regulatory capture here, either, because the purpose of the regulators is not to limit the financial industry but to assist it. When a regulatory body's job is some sort of law or rules enforcement, then regulatory capture is a concern. But not all government agencies are intended as enforcers. Here, the regulatory body is intended to be a supporting player in the market. You don't try to "capture" people who are already on your team. The Federal Reserve is only trying to limit the banks in ways that actually help to keep the banks from hurting themselves. And they try to limit the damage the banks do to others to the amounts covered by insurance, which of course helps the banks avoid liability for what harm they do.
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Your comments are mostly correct, though they ignore regulation-imposed capital requirements and presume that borrowing is cheaper for banks than it is. Here's a good high-level summary: https://www.investopedia.com/a... [investopedia.com]
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The famous "British bankers PDF" release a number of years back explained it all clearly.
So famous that none of us have heard of it. As someone else has already asked, perhaps you could assist with finding us a copy?
Deposits are not assets, they're liabilities.
Of course. The bank holds your money, and must return it to you on demand. That represents a liability to them, as they owe the sum stated in your account.
Outstanding loans are not liabilities, those are assets.
Of course. An outstanding loan has value - the net present value of the future repayments against the loan. Things that have value are assets.
Overall there is an excess of deposits compared to loans.
That would be surprising. Loans are financed by more than merely deposits, so it's easy
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It was discussed on slashdot at the time.
Does information want to be free, or does it not actually care if you read it or not?
I feel the same way! I don't care! Wallow in ignorance, see if I give a fuck.
You wave your hands a lot, right after quoting some part of what I said, even where you know that I'm paraphrasing a credible source and you failed to find the source before attempting to refute it with your hands.
You're trying to argue because you didn't understand what I was saying. Merely that. No need fo
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Interesting. You write utter nonsense, I address it in some detail and you then accuse me of waving hands and failing to understand.
I understood quite enough and my response was to the point, factual and - unlike yours - accurate.
My problem may be that I've worked at multiple banks, and so use the vocabulary that they use, and use it properly. Sorry about that, I can see how that might confuse you.
It isn't free money (Score:3)
Actually it works in a manner similar to banks and their interaction with the FED. How much they can borrow is a fraction of deposits but if the funds borrowed are deposited... rinse and repeat. At the end of the day the money still ultimately has to be paid back though, borrowing with extreme leverage means extreme swings in position and you can end with a negative balance... that you'd then have to pay back.
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In short the worst thing that happens as a consequence of this "bug" is that Robinhood is making more risky loans than it intended. These users are just borrowing more than Robinhood might have intended but they are still on the hook for the losses so there is no reason they shouldn't keep any gains.
Free money except.. (Score:2)
If it goes wrong, your broker dealer can sue you to recover losses...
Apple puts (Score:5, Informative)
Apple has been going up. If he bought Apple puts, they would have lost value - rapidly. Possible trade: He put up $2,000. He bought $50,000 in puts. "Robinhood Gold" settles the trade, takes possession of the puts and sends out $50,000. At this point, $50,000 is gone. The puts then go to zero (expire) or near zero. Someone has to eat that $48,000 in un-covered losses. If the client doesn't wire the money to "Robinhood Gold", "Robinhood Gold" is the broker and must make good on the trade. "Robinhood Gold" will likely pursue him for the full amount. Or perhaps the fellow bought mid-2020 puts. If Apple crashes out to $100 next month, he'll be a millionaire!
If a lot of people are doing this, it could potentially bankrupt "Robinhood Gold".
Re:Apple puts (Score:5, Funny)
I'm embarrassed to admit that sometimes I look at Reddit, and the guy doing Apple puts in fact did use his $2,000 stake to lose $50,000 in a matter of about two minutes. He was in his car at the time. You could tell from the screenshots that overall, he went from $50k to $100k in debt. His post history was classic problem gambler.
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We all have problems.
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Glad I'm not the only one who saw this, linked from outside of reddit thankfully. That guy is really the best part of the whole story.The moron even recorded the whole thing (who does that??), and you really have to watch the moment his trade hits -$50k for maximum enjoyment: https://youtu.be/A-tNkuYV4_Q [youtu.be]
And if shorting apple on 25 leverage wasn't proof enough of his brain genius, his reasoning for betting a against them was that Apple has more female executives that other companies, I kid you not.
https://i. [i.redd.it]
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At this point, $50,000 is gone. ... "Robinhood Gold" will likely pursue him for the full amount. ...
If a lot of people are doing this, it could potentially bankrupt "Robinhood Gold".
After the FBI arrests the clients for fraud, in many cases they might be able to get their money back as restitution without having to sue.
And of course "going bankrupt" merely means they're guaranteed to survive the liability. But the loss of trust might be a bigger deal.
unlimited loans are not infinite money. Student lo (Score:2)
unlimited loans are not infinite money. Student loans are the ones where bankruptcy can't really save you.
But run up big loan on the stock market then chapter 11 or 7 can help and in some cases you can keep your home.
federal pound me in the prison time for the losers (Score:2)
federal pound me in the prison time for the losers if they don't pay up is the worse case if the court can prove they did this for gain or the Chance of gain.
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Just like Fractional Banking (Score:2)
Oh? What's that? Only banks should have access to free money and no one else?
Yes, and some folks say I am the stupid one.
take out an 50K marker at an casino and don't pay (Score:2)
take out an 50K marker at an casino and don't pay. You don't want to know what happens next.
Reads like a commercial? (Score:2)
Playing with this stuff is the road to Hell (Score:1)
Leveraged trading of this sort is not for the amateur. Nor indeed the professional - the Barings Bank collapse springs to mind.
https://en.wikipedia.org/wiki/... [wikipedia.org]