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Robinhood breaks record for largest FINRA penalty with $70 million



FINRA has announced that Robinhood will have to pay a total of $70 million in penalties. This fine is a result of the events which took place in March 2020. During this time, the stock trading app suffered widespread platform outages, which impacted clients who had carried out margin trading.

The penalty is spread out according to several factors. The first $13 million is related to customer reparations. Customers impacted by the service outages will receive reparations based on the level of losses they made due to Robinhood’s error. This impacted thousands of customers and led to a wholesale condemnation of Robinhood across social media. 

$57 million is related to the actions of Robinhood during this crisis. The stock market suffered a crash as a result of the Covid-19 pandemic. This caused a large amount of trading activity to take place. Robinhood allowed for a number of margin trades to take place but didn’t have the technical infrastructure to deal with the increased activity. On top of this, it was found that Robinhood didn’t carry out the required background checks on margin traders and provided misleading information surrounding the risks of margin trading. 

Robinhood

One tragic impact of Robinhood’s failures was the suicide of a 20-year-old trader. FINRA noted that the trader had turned margin off on his Robinhood account, so was shocked to find margins had been used. On top of this, the Robinhood app showed a negative balance on his account, which wasn’t accurate. Robinhood’s behaviour directly impacted his decision to take his own life and FINRA took this into account when levying the penalty. 

FINRA also noted that the company had used an algorithm to determine whether traders could participate in options trading. However, there was limited interaction from real people in this process and the algorithm often used inaccurate information to determine how suitable a trader was. This enabled traders to carry out inappropriate trades and breakthrough red flags that the system failed to have in place. 

Jessica Hopper, EVP and Head of FINRA’s Department of Enforcement stated:

Jessica Hopper, FINRA
Jessica Hopper
Source: LinkedIn

The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers.

Robinhood hasn’t admitted or denied the charges levied against it but has accepted the fine and consented to the findings being placed on record.

Last month, Robinhood saw its plans to go public slowed down due to going back-and-forth with the SEC in recent weeks. The regulator has been asking the online brokerage about its growing cryptocurrency business, according to an anonymous source.

The global news organisation Reuters recently reported that Robinhood Financial failed to report fractional share OTC trades conducted on behalf of their customers. Its failure to report certain OTC trades to public data feeds last year is set to land the brokerage company in more controversy.

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Robinhood breaks record for largest FINRA penalty with $70 million

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