Gearing up: Traders claim to have exploited an ‘infinite leverage’ glitch on the RobinHood app
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Here’s a wild tale that was the talk of US markets (and financial media) overnight.
The first thing it concerns is RobinHood, the brokerage app that facilitates commission-free stock trades, and as recently as July had an implied valuation of almost $8 billion.
And the second thing it concerns is r/wallstreetbets — the Reddit thread frequented by traders — many of whom appear to have an extreme tolerance for risk — to discuss their outsized gains or losses (there are plenty of losses).
Last night, the forum became the talk of markets when a user (u/ontrolthenarrative) claimed they had found a glitch in the RobinHood app which allowed them to double the amount of leverage on trades indefinitely, a practice hence described as “infinite leverage”.
A brief explainer: most platforms allow traders to borrow up to 50 per cent of the value of stocks they buy in their margin account. So as an example of how leverage works (for a glitch-free brokerage service), a trader could deposit $1,000 in their margin account and buy $2,000 worth of shares.
Some of the alleged mishaps on RobinHood involved the sale of call options — a more complex financial derivative that allows the user to collect most of their money up front and sell their stock to a counter-party at a specified time in the future.
Except in this case, for every call option transaction, RobinHood’s software didn’t balance the positions and clear the account; instead, it added the size of the trade onto the user’s total account balance.
As it turns they, Reddit’s u/ontrolthenarrative isn’t the only one in claiming they’ve exploited the glitch to build a geared-up trading balance.
Another user applied a similar technique to turn $2,000 into a $50,000 trading balance at 25x leverage, then lost the funds buying shares in Apple (they posted a video to YouTube).
Of course, building up highly-levered trading positions also increases the risk of potential losses. And based on some of the banter on r/wallstreetbets, it appears the ploy often isn’t used so much as a trading tactic, but rather just a chance to exploit the glitch for the sake of it.
Either way, the entertaining Reddit thread continues to be an apparent source of thrills.
In a response to queries from Bloomberg, RobinHood said it is “aware of the isolated situations and communicating directly with customers”.