A US exchange regulator yesterday ordered Robinhood to pay close to $70m in fines and customer restitution after it ruled the trading app had caused significant harm to millions of customers.
The Financial Industry Regulatory Authority (FINRA), a privately-owned US regulator which polices exchanges and brokers, said in a statement that the combined $57m fine and $12.7m restitution payments was the largest penalty it had ever issued.
The fine related to a series of outages on the firm’s systems in March 2020, which resulted in millions of customers being fed false or misleading information related to trading options. According to FINRA the end result was thousands of Robinhood’s customers were inappropriately approved to trade the complex financial instruments.
Robinhood’s problems surfaced during the March 2020 bear market sparked by the first stage of the COVID-19’s economic impact and saw customers unable to trade instruments during a period of high-volume trading.
FINRA issued a strongly worded statement where it stressed the importance of maintaining market integrity and the need to provide a clear message to exchanges in relation to their customer obligations.
“Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. “The fine imposed in this matter...reflects the scope and seriousness of Robinhood’s violations.”
The trading app gained international recognition in the recent GameStop frenzy and is expected to go public in 2021.
Last year it faced public scrutiny following the suicide of a 20-year old US trader, who killed himself after mistakenly believing he had racked up huge losses on the options market, and FINRA mentioned this in its statement.
FINRA said that since Robinhood first offered options trading in 2017 it had failed to properly assess customers before allowing them to trade.
“The firm relied on algorithms – known at Robinhood as ‘option account approval bots’ – to approve customers for options trading, with only limited oversight by firm principals. Those bots often approved customers to trade options based on inconsistent or illogical information.
As a result, Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been appropriate for them,” FINRA said.
FINRA fined Robinhood $1.25m in 2019 for issues relating to best execution – providing the best price for customers – on its app.
Robinhood neither denied nor admitted the charges levelled against it by FINRA, and in a blogpost yesterday the firm said it took responsibilities to customers very seriously and had substantially expanded and enhanced its customer support operations.
“Robinhood now has approximately 2,700 customer support staff, more than triple the number that we had in March 2020, and we’re continuing to grow this team,” it said in the blogpost.