Robinhood Financial LLC. has been fined $70 million for systemic supervisory failures and causing significant harm to its millions of customers. The company is a subsidiary of Robinhood Markets Inc., an electronic trading platform that allows commission-free trades of stocks and exchange-traded funds via its mobile app.
Financial Industry Regulatory Authority (FINRA), which oversees brokerage firms to ensure market integrity and protect investors, confirmed that this was the largest penalty ever ordered, reflecting the seriousness of the violations committed by Robinhood.
Established in 2013, Robinhood aims to democratize the stock market by providing access to all, instead of the wealthy few.
It claims to do so by providing commission-free trading services to its users via its mobile app, which was launched in 2015. Attracting younger users, the app makes money through three modes: Interest on cash balances, margin lending - and the controversial one - selling order information to high-frequency traders. This last method allows "high-frequency traders" (i.e. wealthy individuals who manage large portfolios) to see what people are buying and selling and execute their orders before average individuals.
In short, it allows them to know where the market is heading, so they can make money at the expense of others' orders.
As of 2021, the app has 31 million users and the company has plans to go public.
The penalty imposed by FINRA consists of a $57 million fine and over $12.6 million in restitution and interest to be paid to customers who were harmed by Robinhood's systemic failures of providing "false" and "misleading information" to its customers
FINRA found that Robinhood did not clarify to its customers the risk they were taking when engaging in certain transactions, how much cash was available in customer accounts, and how much buying power they had. In June 2020, Robinhood had inaccurately displayed negative cash balances to certain customers, pushing one to take his own life.
Financial losses from these inaccuracies, which affected many customers, are estimated to be around $7 million.
For its options trading services initiated in 2017, Robinhood used bots to approve eligible customers. The approvals were based on inconsistent information and consisted of individuals who did not meet Robinhood's own criteria for options trading.
The company has also failed to report tens of thousands of written customer complaints to FINRA, which was a requisite for being FINRA approved. The company followed a policy of blocking certain broad categories of complaints from being reported to FINRA, which were well within FINRA's scope.
The fine also accounts for the series of outages that Robinhood's services faced on March 2-3 of 2020, a period of historic market volatility during which Robinhood's customers were unable to access their accounts. Individual customers lost tens of thousands of dollars during this period. Over $5 million is to be paid in restitution to these customers.
“This action sends a clear message [that]—all FINRA member firms, must comply with the rules that govern the brokerage industry. Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement.
In January 2021, the company restricted the trading of GameStop stock from its platform amid a surge in its prices, for which it is being widely investigated by other regulatory authorities. The app saw a sharp drop in its rating on Google Play Store, even after Google removed "inorganic" reviews.
Robinhood neither admitted nor denied the charges. They have consented to FINRA’s findings.