Robinhood Warns it Expects $26M in Fines Over WallStreetBets Gamestop Furore

Robinhood, a popular trading app, announced on Friday that US regulators were preparing to probe its trading restrictions on shares of GameStop (GME) and others, as reported by Reuters.

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

Robinhood “is cooperating with the regulators’ requests,” wrote the company in its SEC filing. Decrypt has reached out for comment from Robinhood but did not receive a comment by press time.

Settlement well underway

In the filing with the SEC, Robinhood also said that it is prepared to pay $26.6 million in a potential settlement with FINRA over trading outages in March 2020 and its options trading policies around approval and display.

Its 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.

From trading frenzy to regulatory frenzy

The app in January came to public prominence once again and, at the same time, under scrutiny by regulators when it curbed a trading frenzy pushed by short-squeeze investors on social media. Grassroot investors had coordinated on Reddit to frantically buy GameStop’s shares to push up its stock 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.

The SEC FINRA and many other regulators waiting for payments from Robinhood as unfortunately that is all that happens in the securities industry when you blow up trading and lie/cheat your customers.

— Ross Gerber (@GerberKawasaki) February 27, 2021

But perhaps, bad publicity is still publicity—Robinhood added more than 6 million new users for its crypto app in the past two months.

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