Popular investing and stock trading app Robinhood has introduced a new generation to the world of finance, thanks to its app platform and commission-free business model. However, the California-based startup ran into trouble last week as users discovered an exploit that enabled users to borrow far more than they should have been able to.
The bug arose from Robinhood Gold, the app’s subscription component that allows investors to borrow against Robinhood. Selling covered call options using Robinhood Gold would incorrectly add the value of the call option to the user’s available cash, effectively enabling an infinite loop of borrowing and spending. In essence, users were allowed infinite leverage – they could borrow against an amount they had just borrowed.
The issue was first discovered and exploited by users of Reddit community r/WallStreetBets, which teeters on the edge between satirical and actual investment advice. In a since-deleted post, user ControlTheNarrative turned a $2,000 initial deposit into $50,000 of Apple stock. Another user turned $4,000 into a $1 million position. Both of these users ended up losing money on the positions.
According to a statement by spokesperson Lavinia Chirico to Bloomberg, Robinhood is “aware of the isolated situations and communicating directly with customers.” Bloomberg later reported that the bug had been exploited by 20 users, totaling about $100,000 in losses, and that brokerage regulators were aware of the incident and could subject Robinhood to fines.
Robinhood has since closed the technical loophole and restricted the involved accounts. It is unclear if any further action will be taken against the users or Robinhood.
The quickly growing fintech startup has faced other difficulties in the last year. Last December, Robinhood’s launch of a new checking account product was marred by a false claim that deposits would be insured.
