This week, the Financial Industry Regulatory Authority (FINRA) revealed it has fined Interactive Brokers LLC $2.25 million for failing to detect and prevent widespread “free-riding” in customer cash accounts.
FINRA Fines Interactive Brokers $2.25m for Supervisory Failures
In its disciplinary action document, the regulator said the violations occurred over a seven-year period from October 2015 to December 2022 and involved more than 4.2 million transactions in options and issued options.
Free-riding, a prohibited practice under U.S. securities regulations, involves customers buying and selling securities before paying for them in options and issued options.
Despite using automated systems to monitor such activity, Interactive Brokers is said to have failed to include options in its surveillance, allowing customers to bypass payment requirements.
This contravened federal Regulation T, FINRA Rule 4210, and FINRA Rule 2010, which mandate high standards of commercial honour.
The Greenwich, Connecticut-based brokerage also faced penalties for inadequate supervisory systems. FINRA found that the firm’s written supervisory procedures (WSPs) and automated monitoring systems were not designed to comply with regulatory requirements, leading to systemic oversight failures.
In response, Interactive Brokers has updated its surveillance systems, revised its WSPs, and imposed restrictions on accounts involved in free-riding. The firm neither admitted nor denied the findings but agreed to the fine and censure to settle the matter.
