Robinhood Glitch
Emailed on November 8th, 2019 in The Friday Forward
Commission-free investing app Robinhood was hit by a trading glitch that apparently allowed users of the company's subscription product, Robinhood Gold to acquire ‘infinite leverage’ while trading stocks on its millennial-targeting platform.
As a result of the bug, one trader turned his $2,000 balance into the purchasing power of $50,000, but the excessive leverage wiped out his account. Another user supercharged his $4,000 deposit to open a $1 million position.
Quick lesson: Margin is the money borrowed from a brokerage firm to purchase an investment. By buying on margin an investor can increase their purchasing power, and potentially, make more than they could with their own cash. But these loans, like all others, have interest and need to be repaid, so they carry a certain amount of risk.
An investor with a margin account can typically borrow up to 50% of the total purchase price of the marginable investments, so you could see how this glitch is/was a real problem for Robinhood.
A Reddit user reflected on this situation, saying, “Remember folks, if you lose 5 grand, it’s your problem. If you lose 5 million, it’s Robinhood’s problem.”
Robinhood revealed earlier this year that 75 percent of its transaction volume went through its Gold product.