The results are in! A whopping $70 million fine to the trading app, Robinhood. This moment is history considering it is the largest financial penalty ever ordered by FINRA. Robinhood continues to turn off its trading during huge market swings like the meme stock rally that occurred earlier in the year. This decision made by FINRA comes from a multitude of violations that Robinhood has committed that I’ll break down below.
Robinhood’s Violation’s Broken Down
First off, Robinhood has been communicating false and misleading information to its customers. Basically, Robinhood’s misguidance has layers of information. For example, includes whether customers could place trades on margin, how much cash was actually in customer’s accounts, the risk of losing customers faced in certain options transactions, and whether customers even faced margin calls.
For example, one customer who had turned their margin “off,” took his own life in June 2020. Apparently, the customer’s account had a negative $730,165 cash balance displayed in red. But, it may not have reflected uncollateralized debt at all. Rather, it was a temporary balance until the stocks underlying his assigned options settled into his account. This lack of transparency is dangerous for users of the app making it harder to trust the business.
Second, Robinhood uses “option account approval bots” to approve users for options trading. This means that Robinhood’s bots often approved users to trade based on inconsistent information. As a result, Robinhood approved thousands of accounts for options trading. These accounts either didn’t satisfy the firm’s eligibility criteria or contained red flags indicating options trading may not be appropriate for them.
Third, Robinhood failed to reasonably supervise the technology they relied on. Apparently, between January 2018 to February 2021 Robinhood experienced a series of outages and critical systems failures. The most notable one occurred on March 2 and 3, 2020, when Robinhood’s website and app shut down preventing users from accessing their account during a time of historic market volatility as mentioned above.
In addition to the madness, Robinhood failed to report to FINRA tens of thousands of written customer complaints, failed to have a reasonably designed customer identification program, and its failure to display complete market data information.
Who to Trust?
As we can see, it’s hard to instill trust into businesses that aren’t looking out for their customers. After this charge has gone through, it makes one wonder how many other companies are out there cutting corners for their benefit. We as consumers must be careful who we put our money into before it’s too late.
Will you continue to use Robinhood after this? Let us know in the comments below!
This article was originally published on GREY Journal.