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.
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".
Robinhood has changed their app several times based on users finding various bugs and workarounds that affected the trades they can place.
Another famous case is user "1ronyman" who opened up a massive options spread that had a potential loss of $500k which was 50x bigger than his account [1]. Proper risk calculations would never let him make the trade in the first place but Robinhood did and likely had to take the loss.
It shows the dangers of playing fast and loose as a "tech company" in heavily regulated and complex environments like fintech.
Taking this line of thinking a bit further, they may have been trying to get more money from investors, and if they haven't already, now these stories are out they might not be able to. So I wouldn't be surprised if Robinhood freezes all accounts over the next week, and the SIPC gets involved.
Considering the posters of /r/wallstreetbets have a leader board going to see who can glitch the most leverage, it's well within the realm of possibility
>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.
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.
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...
Brokerages are exposed to a lot less of it than e.g. credit cards, because it isn't baked into the model in the same way (and, indeed, the opposite is baked into the model), but it has been known to happen. See the Interactive Brokers 2018 annual report:
Over an extended period in 2018, a small number of the Company’s brokerage customers had taken relatively
large positions in a security listed on a major U.S. exchange. The Company extended margin loans against the
security at a conservatively high collateral requirement. In December 2018, within a very short timeframe, this
security lost a substantial amount of its value. The customer accounts were well margined and at December 31,
2018 they had incurred losses but had not fallen into any deficits. Margin shortfalls were met in a timely manner
by delivery of additional shares by the customers. Subsequent price declines in the stock have caused these
accounts to fall into deficits, despite the Company’s efforts to liquidate the customers’ positions. Through
February 27, 2019, the Company has recognized an aggregate loss of approximately $47 million. The maximum
aggregate loss, which would occur if the securities’ prices all fell to zero and none of the debts were collected,
would be approximately $59 million. The Company is currently evaluating pursuing the collection of the debts.
"Whose money did IKBR lose?" IKBR's. (Mechanically, it's a hit to their shareholder equity, which you can verify with toy math if you like playing balance sheet games.)
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.
On Jan 15, 2015 (aka Black Thursday), the Swiss National Bank unexpectedly floated the Swiss Franc. Some major, well funded brokerages nearly failed as a result of the huge price movements -- their small customers who made a profit kept the profits, but too many small customers ended up with negative balances, the brokerages couldn't practically recover the losses.
Literally they go out of business. Best example is Barings Bank:
"The bank collapsed in 1995 after suffering losses of £827 million (£1.6 billion today) resulting from fraudulent investments, primarily in futures contracts, conducted by its employee Nick Leeson, working at its office in Singapore. "
IANAL but I assume offering unlimited leverage to retail investors is also illegal or at least against SEC guidelines. Besides, if I was insuring RH right now I would be talking about increasing premiums.
I have no idea if SEC guidelines limit the amount of unsecured buying power offered to consumers but it does not follow from any such stipulated guideline that a bug in an order entry system shifts liability to RH from its customers. All applications – including other order entry systems – have bugs like these.
Most regulatory organizations such as SEC enforce "means", rather than "results".
In simple terms:
You will not have problems if a bug happens, as long as you can show that you had a reasonable, best of your knowledge, process to avoid bugs (code review, staging changes, fallback plans, regular analysis/checks, etc).
This does not seem to be the case for RH unfortunately. They will have to explain why the detection / escalation failed for this issue, why no statements were provided, why it was not spotted by internal analytics/checks, why the pre-trade checks let these trades go, etc. They will probably end up with a huge fine.
Disclaimer: I work in a hedge fund that is SFC regulated. I expect the SEC to have pretty much the same policies.
2:1 is correct. Or 1:1, depending on your definition of "normal people". The relevant rule is called Reg T and it's not a limit set by the SEC, but by the Federal Reserve.
This correct. My knowledge comes from +15 years working in finance. I dont know the individual limit on leverage, bit its fairly low. Institutionally is another story.
I was working at a fairly large hedge fund through the 2008 collapse that saw a huge loss due to a 40:1 leverage. Nearly bankrupted the firm. Through September and October, the lot of us working there thought we were doomed and were awaiting the layoffs that never came. As a result, the firm put in a self imposed leverage limit of 10:1 amd divested itself of less liquid assets like bank loans. We held around $20B USD in bank debt that was toxic and couldnt find a market for. No bailout, but something like 60% of $24B USD evaporated in a month. It was all made back in about 18-24 months, though. Crazy times...
No need to increase premiums unless RH has a claim that's covered by their policy. "lol we give away money to whoever asks for it" might well be excluded.
I withdrew all cash from Robinhood and urged everyone to do the same. Funds are not safe. Brokerage accounts are insured by SIPC (similar to FDIC), but you don't want to wait N months to get reimbursed after whatever lengthy court battles are about to go down.
Withdrawing cash is the easy part. Moving the stocks to another brokerage seems like a pain. and I fed don’t want to liquidate my positions for tax purposes
If you're a US person, I don't think you need to liquidate anything - you can request an ACATS transfer and your securities will be moved directly into your new brokerage account. This is a service run by the NSCC so I think would apply to all brokerage firms.
I don't understand why this would be at all difficult for RH to go after. It's clearly fraud. The WallStreetBets top comments seem to have this pretty much dialed in: the best case is that RH unwinds the profits you make; the worst case is, well, much worse.
Because RH is on the hook, immediately, for any losses their users may have incurred. Any reparations they might get from their users would have to be collected individually, through a lengthy legal process, from people who are likely unable to pay.
I wonder if they can actually bust the trades here? That feels unlikely to me. (I don’t know enough about contractual remedies to speculate on whether they can just keep the money in the “flip lands in user’s favor” case.)
Peanut gallery: “Bust trade” has a technical meaning, to tell the counterparty that the trade was in error and pretend it never happened. There are limited circumstances where this is possible. This is different from e.g. “We’re force liquidating these positions.”
I think a broker or marketmaker has in the order of minutes to bust a trade that is "clearly erroneous" and it has to be immediately reported. The exact time period varies by exchange but for example for nasdaq it's 30mins for some trades and 60mins for others https://nasdaqtrader.com/Trader.aspx?id=ClearlyErroneous For the exchanges I'm more familiar with (in Europe) it's less.
The criteria for clearly erroneous trades are incorrect price, size or security though so I don't think this would qualify.
Most likely scenario here is that there is an investigation into fraud and that any gains here get forfeit but users are still required to make good any losses. Separately I would expect RobinHood gets a hefty fine as well.
No chance at this point, traders might have a non-zero risk of a fraud charge of some sort since they are purposefully misrepresenting the value of their account in order to get credit but RH is going to get stuck with the vast majority of the bill.
I don't know, they shouldn't sue them simply for taking advantage of the exploit, these users did knowingly take on leverage by borrowing money to do so. The standard practice when taking on leverage is that you owe the money one way or another. Saying that Robinhood wouldn't have want to give them that leverage, but did give it to them, doesn't really change the legal obligation to make good on a debt willingly and knowingly incurred.
People at the Department of Justice are archiving all these reddit posts. It's pure self-incrimination. The screenshots can be easily tied back to their Robinhood accounts. They won't be getting any easy plea deals. It's a question of whether Robinhood will press charges or not.
Exactly, these folks will be waiting 7 years for their credit to not be obliterated and maybe they might have to wait for some of that in federal prison. What the heck are they thinking?
If someone commits securities fraud I don't think robinhood is the one who has to take them to court, isn't that handled by third parties that will involve themselves regardless of whether or not robinhood wants them to?
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.