Robinhood's Glitch-Triggered Short Sales Of Meme Stock Burned $57 Million

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by Tyler Durden
Thursday, Feb 09, 2023 - 12:50 PM

Amid a major price and volume spike in Cosmos Health on Dec. 16, a "processing error" at Robinhood led to a torrent of short sales that cost the firm a whopping $57 million, the firm disclosed on Wednesday as it reported its fourth quarter results.

On the firm's earnings call, Robinhood CFO Jason Warnick explained that "a processing error caused us to sell shares short into the market, and although it was detected quickly, it resulted in a loss of $57 million as we bought back the shares against a rising stock price." 

CEO Vlad Tenev called the episode "really disappointing." Indeed: At Barron's, Avi Salzman notes the breakdown cost Robinhood 7 cents a share -- "the difference between beating and missing expectations." Analysts expected a 15-cent loss, but the company instead lost 19 cents a share.  

Robinhood's earnings announcement provided a more detailed breakdown of the fiasco: 

"Delays in notification from third parties and process failures within Robinhood’s brokerage systems and operations in connection with the handling of a 1-for-25 reverse stock split transaction of Cosmos Health, Inc. (COSM)...allowed customers, for a limited time, to execute trades selling more shares than they held in their accounts.

This caused a temporary short position...which Robinhood covered out of corporate cash within the same trading day. The resulting loss of $57 million is recorded within brokerage and transaction in the consolidated statement of operations."

Cosmos Health is a pharmaceutical company. As its shares nearly tripled to $23 that day on record volume, "online traders looking for heavily shorted companies accused exchanges of not allowing them to sell their shares into the updraft," recounts MarketWatch's Jeremy Owens.  

The stock then collapsed, closing at $7.59 the next day. On Wednesday, it traded around $5. Robinhood's $57 million loss on the disaster was $4 million more than Cosmos Health's current market cap. 

This guy's fired up, though!

Separately, Robinhood disclosed it is negotiating with the Department of Justice to buy $575 million worth of its own stock that had been purchased by disgraced FTX founder Sam Bankman-Fried, and then seized by the U.S. authorities. The 55 million shares represent 7.6% of the firm's equity. 

Robinhood shares rose about 4.8% in Wednesday's after-hours trading, closing near $11. In the past year, it's traded between $6.81 and $16.49.