Jessica Hopper, head FINRA’s enforcement department, stated that the financial penalty was the most severe ever imposed by the Financial Industry Regulatory Authority. This non-governmental organization oversees the brokerage industry and “reflects the severity of Robinhood’s violations.”
Robinhood launched in 2014 and has revolutionized the brokerage market with zero commission trading and an intuitive app that has attracted a new generation to the market. Robinhood already has over 31 million customers. Many of these people were left behind when the stock market grew without them. It has been subject to criticism from regulators for allegedly encouraging novice traders to trade too risky and causing them harm.
Robinhood did not deny or admit to the allegations made in Wednesday’s settlement. Robinhood shared in a blog post how it improved customer support, including the ability for customers to call and speak with service representatives for certain issues.
Jacqueline Ortiz Ramsay (Robihood’s head for public policy communications) said, “We are happy to put this matter behind and look forward to continuing focusing on our customers.
FINRA’s settlement included the suicide of a customer aged 20 last year. In a note left after his death, he said that he was confused as to how borrowed money could have been used to trade. He thought he had disabled the feature. Robinhood told the customer that his cash balance was now negative $730165.72. It was actually negative $365530.60.
FINRA stated that he was among more than 800,000. Robinhood also allowed him to make trades that could trigger the borrowing of money. He was also one of the over 135,000 customers for whom Robinhood’s mobile app and website gave incorrect numbers for their cash balances between December 2019 and June 2020.
Robinhood was also accused by FINRA of using “approval robots”, which have limited oversight to decide whether customers can trade options. These trades are more risky than buying stocks and can result in bigger losses. FINRA stated that these bots sometimes approved customers based upon “inconsistent and illogical information.” Customers younger than 21 were allowed to trade, but they also indicated that they have more than three years experience trading options.
Robinhood’s past outages were also cited. FINRA accused Robinhood of not being able to reasonably supervise its technology. The worst occurred March 2, 2020, and continued through the next day when Robinhood customers couldn’t access their accounts because of the pandemic that had engulfed markets.
Robinhood will pay $57 million in fines and $12.6 million to thousands more customers as part of the settlement. This is not the first settlement between Robinhood and FINRA. It agreed to pay $1.25million in 2019 after it was accused of not doing enough to ensure that customers were getting the best possible prices when trading stocks. Robinhood did not deny or admit to the allegations.
Robinhood paid $65 million last year to settle allegations by the Securities and Exchange Commission about its dealings and pricing with high-speed traders.
Robinhood is a key player in the rise of small-sector investors on Wall Street, thanks to its growing ranks of younger and less experienced customers.
Many are “retail investors”, which is a term used to differentiate them from professional investors like pension funds, and they are trying to reduce the gap between their wealth and the wealthier families. Many have also encouraged one another to invest in certain stocks together on social media. This has led to some crazy moves in favor of “meme stocks”.
GameStop’s stock price has increased from $20 to $483 this year, but it has fallen to $40, and trades at $210. Trading became so wild that Robinhood and other brokerages temporarily stopped trading in GameStop, and a few other stocks earlier this year. This angered many customers.
Robinhood, which claims it is trying to promote “investing in everyone,” is about to list its stock on Wall Street in one of the most anticipated initial public offerings.
