What is Robinhood?
Just In-Case You Live Under a Rock

Robinhood is the self-described “pioneer of commission-free investing, gives you access to investing and more ways to make your money work harder.” Before Robinhood was “on a mission to democratize our financial system” their story begins almost a decade ago at Stanford, where Baiju Bhatt and Vlad Tenev met as roommates and classmates. After graduation they packed their bags for New York and built two finance companies, selling trading software to hedge funds. The two quickly learned, that big Wall Street firms pay close to nothing to trade stocks, while most Americans are charged up to $10 for every trade.

Bhatt and Tenev quickly made the decision that it was more important to build financial products that would give everyone affordable access to the stock market, not just those of wealth. Two years later Robinhood was created.

Traditionally online investment brokerages like Interactive Brokers & E-Trade would charge you a percentage or “commission” of each closing trade you make. Robinhood disrupted the traditional brokerage business model and allowed investors & traders to place unlimited commission-free trades in stocks, funds, and options with Robinhood Financial. Robinhood users can as well buy and sell cryptocurrencies with Robinhood Crypto & pay zero commission fees.

Is Robinhood Big Deal? YES!

According to an article written CNBC on July 22, 2019, Robinhood landed a $7.6 billion valuation after a recent funding round. The article states that Robinhood went through a massive period of growth very quickly. The platform saw a 50% increase in its user base going from 4 million to 6 million by the end of 2018. Founders and co-CEOs, Baiju Bhatt and Vlad Tenev, have repeatedly said Robinhood’s long-term strategy involves a Robinhood IPO.

Robinhood App Growth

With Great Power Comes Great Responsibility

Since launching in 2013 Robinhood has experienced the type of success, growth and positive industry disruption that all entrepreneurs dream about, but with great growth came great responsibility and it appears Robinhood has dropped the ball.

Halloween is supposed to be a holiday filled with candy, costumes, and fun. Thursday, October 31, 2019, a day that will live in financial infamy. On this day Robinhood’s glitch, now referred to as the “Infinite Money Cheat Code” by members of the Wallstreetbets subreddit would be made public, in a big way!

This “cheat code” allowed traders to borrow via margin trading seemingly limitless amounts of capital without posting anywhere near enough cash as collateral. Even more interesting is that this is was not the first time or isolated incident for Robinhood.

Before we get into the specifics of this let us first layout a timeline of how this all unfolded, starting in January of 2019.

Robinhood’s “Infinite Money Cheat Code” for Beginners

WoodC93 member of the Wallstreetbets Subreddit was the user who took this exploit to the next level. The user was able to accumulate a $950,000 TSLA position, a $425,000 AAPL position by figuring out how to trick the platform into allowing him further margin limits, all with a $15,000 deposit.

The way this glitch worked, members of Robinhood who had $2,000 or more on deposit, and paid the $5 per month fee for Robinhood Gold, are offered margin to trade with. Margin is a line of credit through the broker. Robinhood offered this credit at 2 to 1. For every $1 on deposit, you can trade $2. Now the buyer can purchase twice as much stock as they have money available by using margin.

Once this step is done, the trader would then sell covered calls against the stock they just bought. A covered call is an options trading strategy, which allows you to sell the rights to another buyer, to buy your stock at a particular price, at a later date, but you collect money now for selling that right or option to another trader. This is where the Robinhood programming team fell short. The app would then incorrectly add the value of those options in addition to the value of the stock, and express that total as complete account value, therefore raising the margin limits, and the credit line the trader has available. By repeating this process, some unscrupulous traders were able to build massive positions with very little money. On Monday 11/11/2019 another user on the Wallstreetbets Subreddit posted a $4,000 account that had accumulated over a $1mil position!

It’s hard to understand how such an exploit could continue for well over a week with national news coverage and why it’s taking this much time to fix a seemingly easy programming error, or even how an oversight like this could have happened in the first place.

Consequences & Repercussions

According to an article on Business Insider published on11/12/2019, Josh Elman, Robinhood’s vice president of product, has left the building, after less than two years.

Mr. Elman joined Robinhood in May 2018 from Greylock Investors, where he had served as a general partner for the venture capital firm.

Elman’s time at Robinhood came to an end with very public missteps by the firm, including its failed launch of a checking and savings product and of course the “Infinite Money Cheat Code” glitch. Business Insider states that “A source familiar with the matter said management did not tie the departure to the past events.”

How Will It All End?

This story is ongoing, there are currently many unanswered questions and consequences not yet realized.  

It is unclear if the team at Robinhood are traders themselves or consulted with any options traders during the development of its app, but it is for certain that if there is any hidden trick to making a little more money, traders from Wallstreetbets are sure to find it.

BUT WAIT THERE’S MORE!

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Sources:

  • https://robinhood.com/
  • https://www.cnbc.com/2019/07/22/robinhood-lands-a-7point6-billion-valuation-after-recent-funding-round.html
  • https://www.reddit.com/r/Wallstreetbets/
  • https://outline.com/CqsNy3
  • https://markets.businessinsider.com/news/stocks/robinhood-infinite-money-glitch-draws-regulatory-scrutiny-fine-possible-2019-11-1028674187
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