MyFinancialTimes is a reader-centric site. We may receive compensation from the products and services we mention or recommend in this story, but the opinions are the author's own. Remuneration may impact where offers appear. We may not include all available products or offerings. To learn more you can visit our advertising policy and editorial policy.
Robinhood, the app launched six years ago and named after the legendary bandit, will pay a record fine as part of a settlement of a 123 page complaint brought by the Financial Industry Regulatory Authority (FINRA) concerning Robinhood’s options trading and tech outages.
Robinhood neither admitted nor denied the charges, though it did consent to the entry of FINRA’s findings. FINRA, which was created in 2007, under the aegis of the SEC, was a consolidation of the member regulation, enforcement, and arbitration operations of the New York Stock Exchange, NYSE Regulation, Inc., and NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.
FINRA says the Robinhood fine of $70 million is the largest it has ever leveled.
Robinhood is Surrounded by Controversy
Robinhood allows users to trade stocks and ETFs without paying commissions, and it sees its mission as a democratizing of finance. It has been at the center of a lot of controversies, beginning with its underlying business model. The trades its users execute don’t go from their smartphone to the floor of an exchange. They go to market makers like Two Sigma, GIX Execution Services, and … preeminently … Citadel. These market makers of course pay for receiving them.
The institution of “payment for order flow” was invented by none other than Bernard Madoff, in his “legitimate years.” Much as it once excited comment, payment for order flow is by now yawn-worthy.
But it isn’t only order flow that Citadel and the others pay Robinhood for. The order flow is also a data flow and the idea is that Citadel’s algorithms can make good use of what they can glean from all those millennials using their neat free app. The whole business model sounds as if this “Robinhood” is stealing from the naïve to give to the rich.
Also, since the GameStop volatility at the beginning of this year, Robinhood has been on the receiving end of accusations that it contributes to volatility.
Allegations Against Robinhood
FINRA charged that Robinhood has failed to maintain its technology. This failure led to (in the words of the complaint, “a series of outages and critical systems failures between 2018 and late 2020, which, in turn, prevented Robinhood from providing its customers with basic broker-dealer services, such as order entry and execution.”
Robinhood also allegedly led its users down a garden path with regard to options spread transactions. The complaint says it “misstated the risk of loss associated with options spread transactions,” and gave customers misinformation about the actions the firm would take on the expiration date of those spreads.
An options spread is a position on two or more different options contracts based on the same underlying security. These are complicated and risky positions, and any users inclined to engage in such trading should be made aware of that. As a consequence of Robinhood’s negligence in this regard, “at least 630 customers incurred losses totaling over $5.73 million.”
Miscommunication and Suicide
A young man, Alex Kearns, killed himself believing that he had a negative balance of $730,000 as the consequence of a Robinhood facilitated transaction and the automated communication through which he heard of it. On his final day of life, he reached out to Robinhood’s customer service,, saying “my bought puts should have covered the puts I sold.” He received a canned email back saying “our response time to you may be delayed.”
When they did get around to responding to him, it was another canned message suggesting that his intuition had been corrected. His losses were covered by his put sales and he did not owe anything net. By the time he got that message, he was deceased.