INSUBCONTINENT EXCLUSIVE:
A glitch in the stock trading app Robinhood is allowing users to trade stocks with excess borrowed funds, and the company doesn&t appear
to have found a fix as of this writing.
According to Reddit WallStreetBets forum, and first reported on by Bloomberg, one trader bragged
about a $1 million position funded by a $4,000 deposit
Another says he accessed $50,000 worth of purchasing power, which he used to buy Apple puts
He subsequently lost that money and posted a video of the wipe-out on YouTube (below).
Asked whether the issue has been resolved, how long
it has been possible for users to exploit the platform, and how many people have taken advantage of it, a Robinhood spokesperson sent us a
shortly worded statement that suggests this is far from under control, writing: &We&re aware of the isolated situations and communicating
directly with customers.&
This isn&t the first misstep for Robinhood, a popular platform that caters largely to first-time investors with
its no-frills, no-fees approach to investing
In December 2018, the six-year-old, Menlo Park, Calif
company — which has raised $912 million from investors, much of it led by DST Global — announced it was launching no-fee
checking-and-savings accounts that would provide users with a 3% interest rate — nearly double what other financial institutions
offer.
More than 850,000 people signed a waitlist, hoping to access the accounts, before Robinhood quietly took down mention of them after
regulators said the product, as initially designed, would not be insured by the Securities Investor Protection Corp
(The president of the SIPC further told MarketWatch that Robinood hadn&t discussed the accounts with his agency before announcing them.)
The
company last month announced a new, revamped push into banking via new cash-management accounts that pay 2.05% interest and reportedly come
with the backing of the Federal Deposit Insurance Corp.
No doubt it has more products in the works
Robinhood has been clear about its ambitions to become a &full service financial institution& with every product one can find at a &local
bank branch and more,& as its co-founder and co-CEO Vlad Tenev told us at an event last year
Toward that end, it named former SEC commission Dan Gallagher to its board of directors last month and last year brought on as CFO Jason
Warnick, who&d spent two decades with Amazon previously, including as the company VP of finance.
The startup also applied in April to the
Office of the Comptroller of the Currency for a national bank charter, though a federal judge dealt a blow to the agency late last month,
ruling that it lacks the legal power to grant a bank charter to a nonbank entity that isn&t eligible for federal deposit insurance.
Either
way, allowing unsophisticated users to borrow exponentially more than they&re entitled to, or can presumably pay back, could prove an
embarrassing setback for the fast-growing startup — especially if it not addressed quickly and prevented from happening again.
The
Bloomberg piece notes that Robinhood users who&ve used the exploit to borrow too much could be guilty of securities fraud or, at least, may
need to pay back money lost
But Robinhood is plainly taking a hit here, too.
We&ll update this story when we learn more.
