A glitch on Robinhood's trading app has allowed users to build positions that are worth millions. The "infinite leverage" loophole essentially allowed users to borrow almost limitless amounts of capital for trading. According to inside sources, Robinhood lost almost $100,000 as a result of this issue. The bug was discovered by members of the Reddit group called "WallStreetBets". One user posted that he was able to turn a $3,000 deposit into a $1.7 million position.
The unauthorized trade works as follows: users who pay a premium for Robinhood Gold sell their call options with money that they borrow on the app after which the app incorrectly adds the value of the sale to the user's cash value. Therefore, the more the user borrows, the more the app adds to their buying power. There were apparently no limits on how many times a user can exploit this bug. Robinhood has fixed the bug since and has stated that users will most likely not be able to realize their gains.
The traders could potentially be liable for securities fraud given that they knowingly exploited this bug. The company most likely discovered the bug due to the posts that users made on Reddit, bragging about their gains and their plans on how they plan to use the money. This glitch has also placed Robinhood on SEC's and Finra's (Financial Industry Regulatory Authority) radar and it could be fined if they find compliance lapses. Although the loss was relatively low, this is a less than ideal timing for Robinhood as it is looking to apply for a banking license from the US Office of the Comptroller of the Currency.
Founded in 2013, Robinhood found its popularity among millennials as it allows customers to trade for free unlike other brokerages such as Charles Schwab (NYSE: SCHW), TD Ameritrade (NASDAQ: AMTD) and Fidelity Investments. Robinhood just closed a round of funding over the summer that valued the company at $7.6 billion. Most brokerages now offer commission free trading somewhat due to Robinhood's impact on the market.