Robinhood, Heading for a Trainwreck?

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Bob.Beeman
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Robinhood, Heading for a Trainwreck?

Post by Bob.Beeman » Tue Nov 05, 2019 3:57 pm

It appears that robinhood.com users can trade with large amounts of borrowed money, according to an article at techcrunch.com Robinhood has a glitch that's letting users borrow far more than they should

I don't know whether techcrunch.com is a reliable site or not, and what they are encouraging customers to do sounds contrary to Boglehead principles, but some here may be interested.

- Bob Beeman

lukestuckenhymer
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Re: Robinhood, Heading for a Trainwreck?

Post by lukestuckenhymer » Tue Nov 05, 2019 4:02 pm

Don't give fintech startups your money. These companies exist in a Silicon Fairytale Land where money grows on trees and losing billions every year in the name of growth is an acceptable practice. Why would they be concerned if they lose your money?

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Re: Robinhood, Heading for a Trainwreck?

Post by TheAccountant » Tue Nov 05, 2019 4:12 pm

Basically what happened was the margin limit somehow was able to be bypassed.

https://robinhood.com/support/articles/ ... /overview/

Not sure how margin calls are going to work in this case:

https://robinhood.com/support/articles/ ... gin-calls/

It'll be interesting to see how this all plays out. It's kind of scary to think about, really...
Making cents out of every dollar.

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Re: Robinhood, Heading for a Trainwreck?

Post by TheAccountant » Tue Nov 05, 2019 4:16 pm

lukestuckenhymer wrote:
Tue Nov 05, 2019 4:02 pm
Don't give fintech startups your money. These companies exist in a Silicon Fairytale Land where money grows on trees and losing billions every year in the name of growth is an acceptable practice. Why would they be concerned if they lose your money?
In this case it is the other way around (investors lost Robinhood money.)

I believe this could boil down to either securities fraud (charging the investor,) or restitution law where the investors who took advantage of this will need to pay back the borrowed/lost funds to Robinhood.

This could get ugly.
Making cents out of every dollar.

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Re: Robinhood, Heading for a Trainwreck?

Post by MotoTrojan » Tue Nov 05, 2019 4:23 pm

Check out the Reddit WallStreetBets and let your jaw drop. Be prepared for crude language if that sort of thing offends you.

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Re: Robinhood, Heading for a Trainwreck?

Post by nisiprius » Tue Nov 05, 2019 4:26 pm

TheAccountant wrote:
Tue Nov 05, 2019 4:12 pm
...Basically what happened was the margin limit somehow was able to be bypassed...
Somehow.
"General Turgidson, I find this very difficult to understand. I was under the impression that I was the only one in authority to order the use of nuclear weapons."

"That's right, sir, you are the only person authorized to do so. And although I hate to judge before all the facts are in, it's beginning to look like General Ripper exceeded his authority."
Can someone explain exactly what we are seeing in the video at the bottom of the article, showing somebody's cell phone screen showing $57,000 one minute and -$40,000 the next, but apparently in the green at the end of the clip? It does remind me of the South Park scene where the helpful banker invests Stan's money ...aaaand, it's gone.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Robinhood, Heading for a Trainwreck?

Post by DesertDiva » Tue Nov 05, 2019 4:44 pm

lukestuckenhymer wrote:
Tue Nov 05, 2019 4:02 pm
Don't give fintech startups your money.
Yes... what could possibly go wrong?! :wink:

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Re: Robinhood, Heading for a Trainwreck?

Post by nisiprius » Tue Nov 05, 2019 4:48 pm

Bob.Beeman wrote:
Tue Nov 05, 2019 3:57 pm
...I don't know whether techcrunch.com is a reliable site or not...
Nor do I, nor do I know whether CNBC is... but CNBC is reporting it, too: ‘Infinite leverage’ — some Robinhood users have been trading with unlimited borrowed money.

I don't know about "fintech startups" in general, but after the earlier screwup in calling things a "savings and checking accounts" when they weren't, and claiming the SIPC "insured" them when it didn't, it certainly seems like they believe in "move fast and break things." Insert pun on "broke" here.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Robinhood, Heading for a Trainwreck?

Post by illumination » Tue Nov 05, 2019 4:50 pm

I don't like the idea of keeping my money in an operation that doesn't seem to have much viability. The whole premise of this company seems to be to get a lot of users to sign up and then sell it to someone else. Almost like the "greater fools" theory, because some day, all of these customers will be valuable. But right now, it's losing money like crazy and has no plausible way to make money.

Maybe it works, maybe it doesn't, but it wouldn't shock me in the least if a bunch of accounts are frozen and people are pointing fingers and no one knows where the money is. Most of the people I see using this are playing with it like it's an online casino.

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Re: Robinhood, Heading for a Trainwreck?

Post by retired@50 » Tue Nov 05, 2019 5:05 pm

illumination wrote:
Tue Nov 05, 2019 4:50 pm
I don't like the idea of keeping my money in an operation that doesn't seem to have much viability...

...Most of the people I see using this are playing with it like it's an online casino.
This sounds like a mixture of smartphone video games and investing. Sort of like Candy Crush, but with stocks.

Regards,

columbia
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Re: Robinhood, Heading for a Trainwreck?

Post by columbia » Tue Nov 05, 2019 5:10 pm

I’ll stick with behind the times Vanguard. :wink:

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Re: Robinhood, Heading for a Trainwreck?

Post by Broken Man 1999 » Tue Nov 05, 2019 5:16 pm

I prefer paying my stodgy financial partner a modest sum so there is no reason to cast a jealous eye at my stash.

Disrupting technology is the buzz word that seems to mean we are going to burn through enormous amounts of dollars so we can hopefully sucker enough people to buy our IPO, we can cash out and look for the next investor mark.

Broken Man 1999
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Re: Robinhood, Heading for a Trainwreck?

Post by bluquark » Tue Nov 05, 2019 5:39 pm

nisiprius wrote:
Tue Nov 05, 2019 4:48 pm
I don't know about "fintech startups" in general, but after the earlier screwup in calling things a "savings and checking accounts" when they weren't, and claiming the SIPC "insured" them when it didn't, it certainly seems like they believe in "move fast and break things." Insert pun on "broke" here.
SIPC does insure Robinhood's brokerage accounts, though. So even if Robinhood were to go bankrupt because some clown takes a billion-dollar position with this glitch, bystanders holding stocks or ETFs with Robinhood shouldn't lose money.

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Re: Robinhood, Heading for a Trainwreck?

Post by rascott » Tue Nov 05, 2019 5:59 pm

MotoTrojan wrote:
Tue Nov 05, 2019 4:23 pm
Check out the Reddit WallStreetBets and let your jaw drop. Be prepared for crude language if that sort of thing offends you.

Yeah, was reading it this afternoon. I've followed that sub for quite a while... can't believe those idiots are making national news.

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Re: Robinhood, Heading for a Trainwreck?

Post by cheesepep » Tue Nov 05, 2019 6:02 pm

Was previously thinking of opening a RH account and I wasn't too concerned about them being a startup. Main concern was their customer service or lack thereof. Have to talk to a bot and getting a human is next to impossible. Hence, I am with Schwab.

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Re: Robinhood, Heading for a Trainwreck?

Post by jpsfranks » Tue Nov 05, 2019 6:05 pm

Even if one were not deterred by the apparent holes in their trading platform, now that everyone and their brother is offering commission free trades what would be the reason to choose Robin Hood as your brokerage today?

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Re: Robinhood, Heading for a Trainwreck?

Post by rascott » Tue Nov 05, 2019 6:06 pm

nisiprius wrote:
Tue Nov 05, 2019 4:26 pm
TheAccountant wrote:
Tue Nov 05, 2019 4:12 pm
...Basically what happened was the margin limit somehow was able to be bypassed...
Somehow.
"General Turgidson, I find this very difficult to understand. I was under the impression that I was the only one in authority to order the use of nuclear weapons."

"That's right, sir, you are the only person authorized to do so. And although I hate to judge before all the facts are in, it's beginning to look like General Ripper exceeded his authority."
Can someone explain exactly what we are seeing in the video at the bottom of the article, showing somebody's cell phone screen showing $57,000 one minute and -$40,000 the next, but apparently in the green at the end of the clip? It does remind me of the South Park scene where the helpful banker invests Stan's money ...aaaand, it's gone.


So this guy put $2k.... in an an account... used the glitch to continue to up their buying power by selling covered calls... and then put it all on Apple puts. Which were promptly wiped out within minutes because of his extreme leverage upon leverage.




Here's a good synopsis of the wacky situation. Obviously very bad for RH


https://www.bloomberg.com/opinion/artic ... e-leverage
Last edited by rascott on Tue Nov 05, 2019 6:16 pm, edited 1 time in total.

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Re: Robinhood, Heading for a Trainwreck?

Post by rascott » Tue Nov 05, 2019 6:09 pm

jpsfranks wrote:
Tue Nov 05, 2019 6:05 pm
Even if one were not deterred by the apparent holes in their trading platform, now that everyone and their brother is offering commission free trades what would be the reason to choose Robin Hood as your brokerage today?

Basically none whatsoever. Guess we can thank them for being the instigator towards free trades.

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Re: Robinhood, Heading for a Trainwreck?

Post by Shallowpockets » Tue Nov 05, 2019 6:10 pm

OP. In what way does this matter to you? Are you in on the deal and trading on margin?
Trading on margin is not for most of us here. OPM for sure, but there is no guarantee you you won’t lose it. Then where are you? Paying it back.
Leverage is what got us into 2009 dire straits.

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Re: Robinhood, Heading for a Trainwreck?

Post by MoeMoney » Tue Nov 05, 2019 6:24 pm

bluquark wrote:
Tue Nov 05, 2019 5:39 pm
nisiprius wrote:
Tue Nov 05, 2019 4:48 pm
I don't know about "fintech startups" in general, but after the earlier screwup in calling things a "savings and checking accounts" when they weren't, and claiming the SIPC "insured" them when it didn't, it certainly seems like they believe in "move fast and break things." Insert pun on "broke" here.
SIPC does insure Robinhood's brokerage accounts, though. So even if Robinhood were to go bankrupt because some clown takes a billion-dollar position with this glitch, bystanders holding stocks or ETFs with Robinhood shouldn't lose money.
This. Probably still a pain if it went sideways but not a total loss - also don't keep a serious amount of money (cash or assets) on RH.

I am largely with the anti-Silicon Valley sentiment here with all these money-losing "unicorns" running around but there is nothing wrong with new services, if they are safe and benefit you. All risk tolerance I guess, compare RH to the fly-by-night cryptocurrency exchanges and you'll feel secure.

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Re: Robinhood, Heading for a Trainwreck?

Post by illumination » Tue Nov 05, 2019 7:02 pm

bluquark wrote:
Tue Nov 05, 2019 5:39 pm
nisiprius wrote:
Tue Nov 05, 2019 4:48 pm
I don't know about "fintech startups" in general, but after the earlier screwup in calling things a "savings and checking accounts" when they weren't, and claiming the SIPC "insured" them when it didn't, it certainly seems like they believe in "move fast and break things." Insert pun on "broke" here.
SIPC does insure Robinhood's brokerage accounts, though. So even if Robinhood were to go bankrupt because some clown takes a billion-dollar position with this glitch, bystanders holding stocks or ETFs with Robinhood shouldn't lose money.
Is the "cash" in the brokerage account FDIC insured?

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Re: Robinhood, Heading for a Trainwreck?

Post by nisiprius » Tue Nov 05, 2019 9:00 pm

So, OK, I have to ask. I assume Robinhood does charge interest for these loans? Or not?

What I'm getting at is, so can you put up $4,000, borrow $1,000,000, and invest it in something like BIL (SPDR Blmbg Barclays 1-3 Mth T-Bill ETF) or SHV (iShares Short Treasury Bond ETF)? Let's see, they've been earning over 1% per year, so with 250X leverage that would be 250% per year or over 20% per month...

Well, you know. Just wondering.
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Re: Robinhood, Heading for a Trainwreck?

Post by bberris » Tue Nov 05, 2019 10:42 pm

Shallowpockets wrote:
Tue Nov 05, 2019 6:10 pm
OP. In what way does this matter to you? Are you in on the deal and trading on margin?
Trading on margin is not for most of us here. OPM for sure, but there is no guarantee you you won’t lose it. Then where are you? Paying it back.
Leverage is what got us into 2009 dire straits.
If Robinhood went under, it could take a long time to sort out SIPC payments. An investor could be hurt even if they don't trade on margin. I don't know if OP has an RH account.
If people are making wild bets with unlimited funds and no risk to themselves, that is a problem for the markets as a whole.

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Re: Robinhood, Heading for a Trainwreck?

Post by HEDGEFUNDIE » Tue Nov 05, 2019 10:56 pm

As with most things finance, Matt Levine has the clearest explanation of what happened here:

https://www.bloomberg.com/opinion/artic ... e-leverage

rascott
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Re: Robinhood, Heading for a Trainwreck?

Post by rascott » Tue Nov 05, 2019 11:07 pm

nisiprius wrote:
Tue Nov 05, 2019 9:00 pm
So, OK, I have to ask. I assume Robinhood does charge interest for these loans? Or not?

What I'm getting at is, so can you put up $4,000, borrow $1,000,000, and invest it in something like BIL (SPDR Blmbg Barclays 1-3 Mth T-Bill ETF) or SHV (iShares Short Treasury Bond ETF)? Let's see, they've been earning over 1% per year, so with 250X leverage that would be 250% per year or over 20% per month...

Well, you know. Just wondering.

Yes, they charge 5%. The people who did this were taking giant risks and the one guy is now $50k in debt, but probably wasn't smart enough to even realize what he was doing.

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Re: Robinhood, Heading for a Trainwreck?

Post by AlohaJoe » Tue Nov 05, 2019 11:18 pm

TheAccountant wrote:
Tue Nov 05, 2019 4:16 pm
In this case it is the other way around (investors lost Robinhood money.)
No, they lost their own money. They just borrowed it from Robinhood. If you did a cash out refinance of your home, then went to Vegas and gambled it all away, would you say you had "lost the mortgage company's money"?

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Re: Robinhood, Heading for a Trainwreck?

Post by shelanman » Tue Nov 05, 2019 11:25 pm

AlohaJoe wrote:
Tue Nov 05, 2019 11:18 pm
TheAccountant wrote:
Tue Nov 05, 2019 4:16 pm
In this case it is the other way around (investors lost Robinhood money.)
No, they lost their own money. They just borrowed it from Robinhood. If you did a cash out refinance of your home, then went to Vegas and gambled it all away, would you say you had "lost the mortgage company's money"?
The core problem here is that there is theoretically no limit to how much leverage you could access this way -- potentially losing yourself more money in a bad trade that your total lifetime economic value (at which point, Robinhood isn't going to be able to make you repay the debt)

The other problem is that, if you can borrow enough money that you can't be made to pay it all back, you create moral hazard -- whereby you are incentivized to take unreasonable risks, because you profit if they succeed but are partially protected if they fail

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Re: Robinhood, Heading for a Trainwreck?

Post by NYCwriter » Wed Nov 06, 2019 12:04 am

This was a flaw in their subscription tier, and they've addressed it.

I'm sure the people who aren't bragging on Reddit are the ones who lost money, and yes--they owe that money. I do think it's irresponsible on RH"s part to allow it for as long as they did, since their users tend to be young, and more inclined to actively trade.

I DO think there are good things about Robinhood. It's a product of a low overhead/no-fee investment model and has encouraged brokerages to compete for younger investors by reducing fees--which benefits all of us. The downside is the temptation for active trading.

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Re: Robinhood, Heading for a Trainwreck?

Post by bluquark » Wed Nov 06, 2019 2:05 am

Wow, it still works a day later? I wonder if Robinhood can't shut down margin trading or push an emergency fix without hurting legitimate margin users (threatening to harm their reputation even further).

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Re: Robinhood, Heading for a Trainwreck?

Post by spae » Wed Nov 06, 2019 3:28 am

AlohaJoe wrote:
Tue Nov 05, 2019 11:18 pm
TheAccountant wrote:
Tue Nov 05, 2019 4:16 pm
In this case it is the other way around (investors lost Robinhood money.)
No, they lost their own money. They just borrowed it from Robinhood. If you did a cash out refinance of your home, then went to Vegas and gambled it all away, would you say you had "lost the mortgage company's money"?
I don't even read WSB and it took about two minutes of skimming WSB to find 1R0NYMAN, who's lost tens of thousands of dollars that Robinhood hasn't even attempted to collect. He's owed Robinhood $58k for nine months and has a post every few months saying that Robinhood hasn't contacted him.

He put in $5k, basically got a $245k loan, withdrew $10k in cash while his position was declining to the point that he owed $58k and his account was locked. It's hard to argue that this guy lost his own money when he's up $5k and Robinhood is down $58k. See also, this guy who lost $50k.

How many people do you think have scammed Robinhood out of tens or hundreds of thousands of dollars in the past year and haven't posted about it?
Last edited by spae on Wed Nov 06, 2019 4:00 am, edited 2 times in total.

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Re: Robinhood, Heading for a Trainwreck?

Post by StrangePenguin » Wed Nov 06, 2019 7:42 am

I have a RH account (I owned a couple hundred dollars of an ETF for a while; my only position now is $0.01 in the settlement account).

Overnight, I got an email about a new account statement being ready. Note the second paragraph:
Your latest account statement is now available on Robinhood. You can find this document under “Account Summary” in the app or Account > Documents on web.

We’d also like to take this opportunity to share our Margin Disclosure Statement with you, which describes the risks involved with trading securities on margin. Keep in mind, this only applies to Robinhood Gold accounts with margin enabled.

If you have any questions, feel free to check out our Help Center or send us a message—we’d be more than happy to help!

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Re: Robinhood, Heading for a Trainwreck?

Post by nisiprius » Wed Nov 06, 2019 7:46 am

To state the obvious, if a lot of people successfully borrow money from Robinhood and then invest it and lose it, it may be "their own money" they've lost, but it may take a long time for Robinhood to get it back. On a big enough scale that could put Robinhood under even if the legal paperwork is perfectly clear, and even if "General Ripper exceeded his authority."

"We have no money but our balance sheet is still great because we have bazillions in accounts collectable from people who are legally required to pay us back per their margin agreements..."

But even if they don't fix it instantly and if a lot of people read about it on the Internet and start doing it, I imagine most of them will just to be trying it out to see if they really can, bagging a trophy screenshot of the exploit, and stopping there.

I have to wonder if this doesn't put Robinhood in some kind of regulatory trouble. I suspect that this much carelessness runs afoul of some general duty to use due care when managing ginormous amounts of money.

If the actual number of dollars involved doesn't exceed the nuisance level for Robinhood, the PR could work both ways. Certainly a lot of ordinary folk might think twice about trusting their money to arrogant clowns. On the other hand, all publicity is good publicity and it certainly calls attention to Robinhood. It will attract a certain personality type who like being on the bleeding edge for its own sake, and who admire Robinhood's devil-may-care stance.

I think a big problem for them might be that it will attract a lot of casual hackers who will start aggressively exploring, looking for other intriguing undocumented features of Robinhood's system.
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Re: Robinhood, Heading for a Trainwreck?

Post by mancich » Wed Nov 06, 2019 7:56 am

lukestuckenhymer wrote:
Tue Nov 05, 2019 4:02 pm
Don't give fintech startups your money. These companies exist in a Silicon Fairytale Land where money grows on trees and losing billions every year in the name of growth is an acceptable practice. Why would they be concerned if they lose your money?
+1. Stick with established reputable companies

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Re: Robinhood, Heading for a Trainwreck?

Post by Bengineer » Wed Nov 06, 2019 8:35 am

There's a bit of irony in their name - "stealing from the poor to give to the rich"... :mrgreen:

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Re: Robinhood, Heading for a Trainwreck?

Post by firebirdparts » Wed Nov 06, 2019 9:41 am

Good advice here (Matt Levine):
... you should not underestimate the importance, in trading generally, of impressing people with your wit and boldness.
A fool and your money are soon partners

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Re: Robinhood, Heading for a Trainwreck?

Post by HEDGEFUNDIE » Wed Nov 06, 2019 10:18 am

mancich wrote:
Wed Nov 06, 2019 7:56 am
lukestuckenhymer wrote:
Tue Nov 05, 2019 4:02 pm
Don't give fintech startups your money. These companies exist in a Silicon Fairytale Land where money grows on trees and losing billions every year in the name of growth is an acceptable practice. Why would they be concerned if they lose your money?
+1. Stick with established reputable companies
Like Lehman Brothers, Bear Stearns, AIG, and GE?

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Bob.Beeman
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Re: Robinhood, Heading for a Trainwreck?

Post by Bob.Beeman » Wed Nov 06, 2019 4:18 pm

Shallowpockets wrote:
Tue Nov 05, 2019 6:10 pm
OP. In what way does this matter to you? Are you in on the deal and trading on margin?
Trading on margin is not for most of us here. OPM for sure, but there is no guarantee you you won’t lose it. Then where are you? Paying it back.
Leverage is what got us into 2009 dire straits.
I am a Boglehead, so it doesn't directly affect me at all. You are correct that this is what got us into trouble in 2009. That's what bothers me: a bunch of idiots (or possibly crooks) can wreak havoc on everyone if their misbehavior is big enough. For example, I wonder how many schemes like this there are, and whether SIPC (if they are on the hook) has deep enough pockets. Let's hope that the SIPC DOESN'T pay off. That would reduce the supply of miscreants without harming any of us.

- Bob Beeman

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Re: Robinhood, Heading for a Trainwreck?

Post by MoeMoney » Wed Nov 06, 2019 6:16 pm

Bob.Beeman wrote:
Wed Nov 06, 2019 4:18 pm
Let's hope that the SIPC DOESN'T pay off. That would reduce the supply of miscreants without harming any of us.

- Bob Beeman


Woof. Right up there with "I hope the market crashes so I can buy in cheap. F everyone else."

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Re: Robinhood, Heading for a Trainwreck?

Post by Bob.Beeman » Wed Nov 06, 2019 6:33 pm

MoeMoney wrote:
Wed Nov 06, 2019 6:16 pm
Bob.Beeman wrote:
Wed Nov 06, 2019 4:18 pm
Let's hope that the SIPC DOESN'T pay off. That would reduce the supply of miscreants without harming any of us.

- Bob Beeman
Woof. Right up there with "I hope the market crashes so I can buy in cheap. F everyone else."
Not really. People who engage in illegal use of margin are not "everyone else". Making an example of people who break the rules and endanger those who follow the rules is not a vicious thing. Just as arresting bank robbers is not a vicious thing. It just protects honest people. Laws regulating human behavior always have some disincentive (punishment) to discourage irresponsible behavior. Innocent people are hurt by things like "RobinHood" if the misbehavior reaches huge levels. Hoping that a bank robber slips and breaks his leg in the lobby is not an evil thought.

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Re: Robinhood, Heading for a Trainwreck?

Post by pepys » Wed Nov 06, 2019 7:26 pm

Bob.Beeman wrote:
Wed Nov 06, 2019 4:18 pm
Shallowpockets wrote:
Tue Nov 05, 2019 6:10 pm
OP. In what way does this matter to you? Are you in on the deal and trading on margin?
Trading on margin is not for most of us here. OPM for sure, but there is no guarantee you you won’t lose it. Then where are you? Paying it back.
Leverage is what got us into 2009 dire straits.
I am a Boglehead, so it doesn't directly affect me at all. You are correct that this is what got us into trouble in 2009. That's what bothers me: a bunch of idiots (or possibly crooks) can wreak havoc on everyone if their misbehavior is big enough. For example, I wonder how many schemes like this there are, and whether SIPC (if they are on the hook) has deep enough pockets. Let's hope that the SIPC DOESN'T pay off. That would reduce the supply of miscreants without harming any of us.

- Bob Beeman
Please do not engage in insults against the good people of WSB.
Not really. People who engage in illegal use of margin are not "everyone else". Making an example of people who break the rules and endanger those who follow the rules is not a vicious thing. Just as arresting bank robbers is not a vicious thing. It just protects honest people. Laws regulating human behavior always have some disincentive (punishment) to discourage irresponsible behavior. Innocent people are hurt by things like "RobinHood" if the misbehavior reaches huge levels. Hoping that a bank robber slips and breaks his leg in the lobby is not an evil thought.
Robinhood does appear to be violating regulations by extending far too much leverage. They could be fined for that, which would be an incentive to better code how margin allowances are calculated. But I don't see how they could get anything from the SIPC.

Customers of Robinhood could. But customers of Robinhood don't seem to be breaking the law, I think at most some of them could be breaking Robinhood's TOS, and even that is questionable. They're just using margin up to their personal risk tolerance, as requested by Robinhood.

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Re: Robinhood, Heading for a Trainwreck?

Post by MotoTrojan » Wed Nov 06, 2019 7:37 pm

nisiprius wrote:
Tue Nov 05, 2019 9:00 pm
So, OK, I have to ask. I assume Robinhood does charge interest for these loans? Or not?

What I'm getting at is, so can you put up $4,000, borrow $1,000,000, and invest it in something like BIL (SPDR Blmbg Barclays 1-3 Mth T-Bill ETF) or SHV (iShares Short Treasury Bond ETF)? Let's see, they've been earning over 1% per year, so with 250X leverage that would be 250% per year or over 20% per month...

Well, you know. Just wondering.
If you look at the actual process for getting the borrowed $1M (or whatever amount) it requires a sequence of taking margin on equity, and then investing in a covered call, so I do not think it is possible to achieve a truly risk-free position, interest aside.

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Re: Robinhood, Heading for a Trainwreck?

Post by nisiprius » Wed Nov 06, 2019 7:48 pm

With regard to SIPC, I don't see how they are involved at all. The SIPC provides what I call "statement insurance." They guarantee that if a brokerage says you have 100 shares of Acme, you really have 100 shares of Acme. More precisely, that the brokerage has 100 shares of Acme somewhere, and accounting systems in place to make sure they have enough to match all the shares held by all their investors, and to insure that if you want "your" 100 shares they can find them for you.

If it turns out that they can't, for whatever reason, then the SIPC promises to make you whole.

The SIPC was founded when brokerages had little security, their back-office operations were chaotic, and, let me phrase this carefully, the New York Times reported the existence of rumors about underworld involvement.

The SIPC potentially protects a brokerage's customers against fraud committed by the brokerage. For example, Madoff's firm literally gave customers fraudulent statements. In one case, a client was shown with listed holdings in the "Fidelity Spartan U.S. Treasury Money Market Fund," which did not exist at the time the statement was issued.

The SIPC doesn't protect a brokerage against fraud committed against the brokerage.

Now suppose large numbers of Robinhood customers successfully got huge loans, invested them, and lost the money, leaving Robinhood without cash, only with balance sheet entries representing their legal right to demand that their customers pay that money back... perhaps Robinhood could go bust. In the best case, during the collapse they would smoothly transfer all of their customers' accounts to a solvent brokerage. In a bad case, one might imagine that they would collapse in such a chaotic way that they couldn't keep track of customers' accounts and couldn't locate the securities that were supposed to be in them. In that case, SIPC would have the job of protecting the customers.

The take-home here is that if one seriously believes ones' brokerage is in danger of collapse--but does not want to transfer one's assets out of it--one should be careful to collect regular copies, paper or electronic, of ones' statements as evidence of what's supposed to be in your account, should the SIPC ever need to know.
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