Robinhood Financial has agreed to pay a record US$70 million to resolve a range of allegations, such as misleading customers, allowing ineligible traders to use high-risk strategies, and poorly supervising technology that failed, locking millions of customers out of trading.
The $70 million settlement with FINRA (Wall Street’s self-regulator) includes a $57 million fine and about $12.6 million in payments to customers who were negatively impacted by the US company’s actions.
This is not the first time that Robinhood has had a run-in with a regulatory body. In 2019, FINRA fined the company US$1.25 million for failing to guarantee customers the best price on their trades. And in 2020, Robinhood was fined another $65 million by the SEC for misleading customers about the true costs of trading using its commission-free facility.
High-Risk Strategies
Robinhood was accused of exposing customers to several high-risk trading strategies, such as options and margin trading. Options, which allow traders to buy or sell shares at set prices in the future, can vastly amplify gains or losses. The company allegedly used bots to approve traders for options accounts without a human presence in the middle to properly determine whether they were actually eligible or not.
Robinhood was also charged with failing to disclose to more than 800,000 customers who were approved for options accounts that their trading could involve the use of margin lending, which exposes traders to losses significantly larger than the money invested. Tragically, a 20-year-old customer killed himself last year after he thought he’d lost more than US$700,000 using the app to trade options with margin lending activated. Subsequently, the family took Robinhood to court and settled the matter.
Service Disruptions
In March 2020, just as pandemic panic started wreaking havoc on the stockmarket, Robinhood’s trading platform experienced a series of technological disruptions, including one outage that locked users out of trading for more than 24 hours. Being blocked from trading during one of the worst crashes in recent history resulted in catastrophic losses for many traders.
Rocket Ship or Sinking Ship?
Robinhood, which had fewer than 500,000 users in 2015, has now surged to more than 31 million users. At the start of the year, during the Gamestop short squeeze, Robinhood was a popular choice because it provided easy access to the stockmarket for everyday people, which many regarded as revolutionary or game-changing. However, with its third large fine in as many years, you can’t help but wonder how many cannonballs can this ship take before it starts to take on water?
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