Author Topic: Robinhood Traders Discovered a Glitch That Gave Them ‘Infinite Leverage’  (Read 1195 times)

BTDretire

  • Magnum Stache
  • ******
  • Posts: 3026
"Dubbed the “infinite money cheat code” by users of Reddit Inc.’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."
https://www.bloomberg.com/news/articles/2019-11-05/robinhood-has-a-glitch-that-gives-traders-infinite-leverage


And Hacker News discussion.
https://news.ycombinator.com/item?id=21454344

Anyone see this in their feed?

maizefolk

  • Magnum Stache
  • ******
  • Posts: 4682
Yes I saw this on reddit the other day. Crazy but understandable that a bug like this could exist. Crazy and much harder to understand how a bug like this could be reported in the wild, being actively exploited by growing numbers of people, and continue to be left open for days.

Just turn off new margin lending for a few days if fixing the actual issue is challenging.

nippycrisp

  • Pencil Stache
  • ****
  • Posts: 565
Video of guy losing $60K in a few seconds using this technique: https://www.youtube.com/watch?v=A-tNkuYV4_Q&app=desktop 0:43 is where his world ends. Although I suspect Robinhood is eating at least some of this.

Infinite something, that's for sure.

BECABECA

  • Bristles
  • ***
  • Posts: 462
  • Age: 38
  • Location: Huntington Beach, CA
  • Retired since July 2017, not bored yet!
Whoa, that’s insane. There’s no way Robinhood can eat all this and remain solvent. If I had an account with them, I’d be trying to transfer everything out ASAP.

maizefolk

  • Magnum Stache
  • ******
  • Posts: 4682
Video of guy losing $60K in a few seconds using this technique: https://www.youtube.com/watch?v=A-tNkuYV4_Q&app=desktop 0:43 is where his world ends. Although I suspect Robinhood is eating at least some of this.

Infinite something, that's for sure.

I think you are right.

My guess is that if you have $60k to your name you wouldn't be tempted to leverage up 25:1 to bet on something with about 50/50 odds (does apple open up or down). So Robin Hood will have to eat a lot of the losses one way or another because there's little if any money to be gotten from their (now former) customers.

Fru-Gal

  • Bristles
  • ***
  • Posts: 267
This had me slightly worried as a RH user (I'm not trading a lot of money there, and definitely not margin trading), but then I came across this explanation on the Reddit thread cited by OP.

Quoting from Reddit:
   
jakenberg 3 days ago [-]

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.
reply
   
tenpies 3 days ago [-]

> 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.
reply
   
jakenberg 3 days ago [-]

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.
reply

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 2250
Suppose a glitch occurred that was not in the investor's favor? How hard would it be to convince your brokerage that their computer did the math wrong?

Examples:
 -being charged margin interest while not using margin
 -being liquidated while not using margin
 -having the wrong commission price applied, e.g. for a broker-assisted transaction
 -being told a trade executed when it didn't, and losing $ as a result

You'd be in a circular conversation with customer service with them saying "our records show..."

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1463
Infinite leverage:  RH is likely in some regulatory heat now, but my bet is that the users who took advantage of the glitch are as well. Regulations around margin and how much you can take are very clear. This isn't like a glitch in a video game. This has real consequences, including manipulating the markets of securities bought with the infinite leverage. The broker dealer, RH in this case, normally builds the margin rules into the trading platform so that it's impossible for the investor to break them. Now that they've been broken, and the users were bragging about breaking them, I doubt they will be ignored. The people who lost $60k might actually be the lucky ones, maybe they will get to fly under the radar. The person who made $1,000,000+ using this glitch will probably be the one the SEC makes an example of.

This had me slightly worried as a RH user (I'm not trading a lot of money there, and definitely not margin trading), but then I came across this explanation on the Reddit thread cited by OP.

Many other brokerage firms now offer $0 commissions. That was RH's main selling point.

Charles Schwab VS Robinhood, assuming fees are the same:  One is tiny and looks to be in for a rough round of legal problems. They really really screwed up something every major investment firm did without issue, allowing margin. They also recently had a hard time setting up a banking account, which shouldn't be hard, but they managed to screw that up too. Schwab on the other hand is massive, already has bank accounts, has had margin for years(decades?), stays out of legal problems, and even if something like this happened they have the cash and infrastructure to fix it and eat the legal expense. The very fact that this went on(is still going on?) for so long before RH fixed it is a very bad sign. For me this is an easy decision, go to Schwab(or Fidelity, TD, etc.).


Suppose a glitch occurred that was not in the investor's favor? How hard would it be to convince your brokerage that their computer did the math wrong?

Examples:
....

I'm 99.99% sure all of these examples have happened in real life. Investment firms have well defined research processes for this sort of thing, and if was their fault they refund the client. There are also regulations defining how quickly they respond to such an event and spelling out the consequences if they don't. Now I'm referring to the big players, like Vanguard, Schwab, Fidelity, etc.  Robinhood?  The fact that this went on this long tells me they are in a bad spot and trying to play catch up.