Robinhood Expects To Pay $26.6 Million FINRA Fine

Editor's note: On June 30, 2021, FINRA ordered Robinhood to pay $70 million in penalties. Read all about it here.

Robinhood, the popular stock trading app, announced on Friday that US regulators were preparing to probe its trading restrictions on shares of GameStop (GME) and others.

The company said in a filing with the US Securities and Exchange Commission that it is cooperating right now with investigations by a number of regulatory bodies, including the SEC, the Financial Industry Regulatory Authority (FINRA), and the New York Attorney General’s Office.

Decrypt has reached out to Robinhood for further comment.

Settlement underway

In the SEC filing, Robinhood also said it is preparing to pay at least a $26.6 million potential settlement with FINRA—not over the GameStop restrictions, but over trading outages in March 2020 and its options trading policies around approval and display.

Robinhood, in its filing, said it is "engaged in discussions with FINRA staff regarding a possible negotiated resolution of certain FINRA matters, including the March 2020 Outages and options trading," and that it expects that "any resolution, if reached, would involve charges of violations of FINRA rules, a fine, customer restitution, a censure, and a compliance consultant. We have accrued in our statement of financial condition for the year ended December 31, 2020 of $26.6 million representing the bottom of the range of our probable losses. We cannot predict, however, whether these discussions will result in a resolution of these matters."

From trading frenzy to regulatory frenzy

Robinhood's options trading policies became particularly contentious when Alex Kearns, a 20-year old trader, committed suicide last year after wrongly believing that he had lost nearly $750,000 in an options bet made on Robinhood. In reality, he had a balance of $16,000, but that was allegedly miscommunicated.

The app in January came under scrutiny once again when it halted buying of GameStop shares amid the trading frenzy pushed by short-squeeze investors on social media. Grassroots investors had coordinated on Reddit to buy GameStop shares to push up prices, forcing hedge funds to buy up even more.

As the frenzy unfolded, Robinhood put a swift stop to trading on GME and other shares subject to similarly unusual demand, including Nokia (NOKIA) and AMC Entertainment Holdings (AMC). Separately, it also restricted instant deposit buys for cryptocurrencies.

The company defended the trading restriction—the extraordinary demand spiked up its bills to clearing house companies, forcing them to take this decision, it said in an effort to justify the controversial move. “It was not because we wanted to stop people from buying these stocks,” the company said.

But none of these public statements did do much to calm the angry traders who questioned the app’s claim to “democratize trading,” since the move was seen to be in the interest of Wall Street.

The SEC vowed to protect the traders, and it’s now been joined by others in the regulatory efforts to scrutinize Robinhood.

Meanwhile...

The regulatory headache comes at a particularly inopportune time for the company as it prepares to go public later this year, boasting a reported valuation of about $20 billion.

But bad publicity is still publicity—Robinhood added more than 6 million new crypto customers in just the past two months.