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. "
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".