Robinhood in talks to settle Finra polls on options trading practices, outages

Two subsidiaries – Robinhood Financial and Robinhood Securities – are currently negotiating a settlement with Finra over breakdowns and options trading practices, which could include charges of violating Finra’s rules, a fine, a refund to clients and hiring. a compliance consultant. The probes could cost the company at least $ 26.6 million, according to the filing.

Robinhood has also drawn the interest of prosecutors and regulators, and the anger of many customers, for its decision last month to restrict purchases of GameStop. Corp.

and other high-end stocks. The U.S. District Attorney for the Northern District of California, the SEC, Finra, and the attorneys general of New York and other states have sent inquiries to Robinhood about the trade restrictions, according to the filing. Robinhood is also facing dozens of lawsuits from users for trade restrictions.

Perhaps no company has benefited as much from the retail boom of the past year as Robinhood. Its ease of use and commission-free model have brought millions of new users to its app in 2020. But an increase in trading activity during the market blackouts of last March put a strain on Robinhood’s infrastructure. , causing its trading platform to go offline for all or part of three days that month and sparking outrage among users.

As more and more inexperienced traders came to Robinhood and the markets, the company came under criticism for how easy it was to trade risky options. In December, the Massachusetts securities regulator filed a lawsuit against Robinhood, accusing the company of approving clients to engage in options trading without having the necessary qualifications. In its response, Robinhood said it was legal to allow clients to trade options and Robinhood to “approve clients for options trading based on their previous experience with options”.

The Massachusetts complaint came months after 20-year-old student Alex Kearns died by suicide after believing he had racked up big losses from options trading on Robinhood due to an incomplete posting of its positions in its Robinhood app.

His family recently filed a wrongful death lawsuit against Robinhood, accusing the company of contributing to Mr Kearns’ death through “misleading communications” about its investments and “virtually non-existent” customer service. They are asking for unspecified damages.

About 13% of Robinhood users have traded options through the app, Robinhood CEO Vlad Tenev said in written testimony ahead of a congressional hearing last week. Robinhood assesses clients’ investment experience and knowledge in deciding whether or not to approve their requests to buy and sell these contracts. Last year, following Mr Kearns’ death, Robinhood redesigned its options trading interface to add more protections for investors and made it more difficult for new clients to qualify to trade certain types of trading strategies. ‘options.

Yet Mr. Tenev also revealed in his testimony that Robinhood recently discovered that some clients who traded call options were behaving in a financially irrational manner.

Call options give investors the right, but not the obligation, to buy a specific amount of shares at a specific price, known as the strike price, for a specific window of time before they expire. . If a call option is “out of the money,” meaning the price of the underlying stock is lower than the strike price, a client is better off letting the option expire.

In January, Robinhood noticed that some users “occasionally exercise OTM options, causing them to suffer losses immediately after exercise,” Tenev said. Robinhood implemented an early warning system and required clients seeking to exercise out-of-the-money options to speak to a company representative first. On January 29, it stopped allowing clients to exercise out-of-the-money options.

Options trading is particularly lucrative for Robinhood. Most of the company’s income comes from the payments it receives when it routes customer orders to merchants at high speed. This activity, known as “payment for order flow,” earned Robinhood about $ 440 million for options trading in 2020, compared to about $ 247 million for stock trading, according to filings. of titles.

Write to Peter Rudegeair at [email protected]