If you think about the brokerage company Robinhood, it was done a wonderful job shaking up Wall Street and introducing new retail investors to stock trading. If you use Robinhood, one of the biggest reasons for using the app is low commission or zero commissions to buy and sell. In that sense, Robinhood makes it easy to set up an account and begin trading. The downfall is they do a poor job on allowing people to use margin and for many the margin or borrowing is too easy and too much. Margin is the wonderful double edge sword – if you use it you can juice up your returns, if you are wrong you end up with too much debt. Debt has to be repaid.
In an article by Stan Choe of the Associated Press, Robinhood Financial will pay close to $70 million to settle a wide range of allegations including it gave its customers misleading information and allowed some users to make riskier trades after they lied about their trading experience.
The financial penalty is the largest ever ordered by the Financial Industry Regulatory Authority (FINRA), a non-governmental organization that oversees the brokerage industry. Jessica Hopper, head of FINRA’s department of enforcement said it reflects the scope and seriousness of Robinhood’s violations.
Robinhood neither admitted nor denied the allegations but for its 31 million customers, has improved support for customers, including talking to a service representative on some issues.
FINRA noted Robinhood seemed to be using approval lots with very limited oversight to decided whether to allow customers to trade options.
Robinhood has been fined before.in 2019 it paid $1.25 million and 2020 paid $65 to the US Securities and Exchange Commission that it failed to tell customers who the settlement of trades worked. Robinhood goes through a division of Citadel Securities and prices may not be the ones on the screen, likely a little higher.
Linking to dividend paying companies, Robinhood is a new company challenging the rules of the game and it is not surprising the more established companies exert influence over the regulator. The regulator likely did the best thing for everyone but one has to wonder why it was the biggest fine in FINRA’s history. Companies have a love hate relationship with the regulators. They love it when the regulator punishes their opponents and believe they have a working relationship with the regulators and hate it when they come after them.
There are more questions than answers, till the next time – to raising questions.