Reddit users who exploited finance app could be investigated by SEC, says expert
Reddit users found what they call a “cheat code” to the trading app Robinhood.
According to a thread on r/wallstreetbets, users figured out how to trade stocks with money they didn’t have but the app thought they did. Bloomberg describes the cheat code as “allowing users to trade stocks with excess borrowed funds, giving them access to what amounts as free money.”
The exploit was available to Robinhood Gold members, which requires members to deposit $2,000 or more into their account and pay $10 a month according to Vice. Robinhood Gold members can take out a line of credit from Robinhood to buy stocks on a “margin.”
But the glitch allowed users to sell a “covered call” contract, reports Vice. Covered calls include a trader selling the “call options” for the stock, or contracts that ensure the trader can trade the stocks at a specific price before a specific date.
Essentially, Bloomberg says Robinhood created the exploit when it added the value of the calls to the users account. The exploit allowed users to make leveraged trades with cash they did not have to back the transactions. Users were gambling infinite amounts of Robinhood’s money.
According to the Reddit page dedicated to the hack, one user leveraged $48,000 on a $2,000 deposit. Another user leveraged $1.3 million on a $15,000 deposit.
Robinhood was able to close the loophole on November 7, 2019, just days after users found the exploit, according to the Reddit post describing the loophole. The company also says that it has reached out to users who have exploited the loophole on their app. There could be bigger legal troubles for the users, too.
“If there’s an element of deceit, that you got this by exploiting a loophole in a system, I can see how that could become a securities fraud case,” Donald Langevoort, a law professor at Georgetown University, told Bloomberg News. Langevoort also said the user could be forced to pay back money through restitution.
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