Robinhood Markets Inc. is in talks to pay a fine to end investigations into its options and disruption trading practices that the stock trading app suffered in March 2020, according to a stock document.
The Securities and Exchange Commission, state regulatory authorities and the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm, are examining Robinhood’s conduct on these issues, including how Robinhood “displays money and purchasing power to customers and their approval processes options trading, “the company said in the process.
Two subsidiaries – Robinhood Financial and Robinhood Securities – are currently negotiating an agreement with Finra on interruptions and options trading practices, which may include allegations of violations of Finra rules, fine, refund to clients and hiring a consultant compliance. The surveys could cost the company at least $ 26.6 million, according to the document.
Robinhood also attracted the interest of promoters and regulators, and the ire of many customers, for his decision last month to restrict GameStop purchases Corp.
and other high-flying actions. The United States attorney for the northern California district, the SEC, Finra and the attorney generals of New York and other states sent consultations to Robinhood about trade restrictions, according to the document. Robinhood also faces dozens of lawsuits from users over trade restrictions.
Perhaps no company has benefited more from last year’s retail stock trading boom than Robinhood. Its ease of use and zero commission model brought millions of new users to your app in 2020. But an increase in trading activity during the market’s fainting spell last March overloaded Robinhood’s infrastructure, making his trading platform totally offline or partially for three days in that month and generating user indignation.
As more inexperienced traders arrived at Robinhood and the markets, the company was criticized for the ease with which it traded risky options. In December, the Massachusetts securities regulator filed a complaint against Robinhood, accusing the company of approving clients to engage in options trading without having the necessary qualifications. In his response, Robinhood said it was legal to allow clients to trade options and for Robinhood to “approve clients for options trading based on previous experience with options”.
Massachusetts’s complaint came several months after Alex Kearns, a 20-year-old student, died of suicide after thinking he had accumulated huge losses in options trading in Robinhood because of an incomplete display of his positions in his Robinhood app.
His family recently filed a wrongful death lawsuit against Robinhood, accusing the company of contributing to Mr. Kearns’s death through “misleading communications” about his investments and “virtually nonexistent” customer service. They are seeking unspecified damage.
Executives at Robinhood and other companies testified before Congress on Thursday after the January trade frenzy involving GameStop and other securities raised concerns about the integrity of the U.S. stock market and the rules that govern it. Photo illustration: Ang Li (originally published on February 18, 2021)
About 13% of Robinhood users traded options through the app, Robinhood chief executive Vlad Tenev said in a written statement before a congressional hearing last week. Robinhood evaluates customers’ investment experience and knowledge when deciding whether to approve their purchase and sale orders under these contracts. Last year, after Kearns’s death, Robinhood redesigned his options trading interface to add more investor protection and made it more difficult for new clients to qualify to trade certain types of option strategies.
However, Tenev also revealed in his testimony that Robinhood recently discovered that some customers who were negotiating call options were behaving in a financially irrational manner.
Call options give investors the right, but not the obligation, to buy a specific number of shares at a specific price, known as the strike price, during a specific window of time before they expire. If a call option is “out of the money”, which means that the price of the underlying stock is below the strike price, it is best for a customer to let the option expire.
In January, Robinhood noted that some users “were occasionally exercising OTM options, causing them to suffer losses immediately after exercise,” said Tenev. Robinhood implemented an alert system and required customers looking to exercise out-of-the-money options to speak to a company representative first. On January 29, he stopped allowing customers to exercise out-of-the-money options.
Option trading is especially profitable for Robinhood. Most of the company’s revenue comes from the payments it receives when routing customer orders to high-speed merchants. This deal, known as “order-flow payment,” earned Robinhood about $ 440 million for options trading in 2020, compared with about $ 247 million for stock trading, according to securities records.
Write to Peter Rudegeair at [email protected]
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