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FINRA finds Robinhood exposed rookie investors to ‘unnecessary risks’

Written By | Dec 17, 2020
Robinhood, FINRA

A statue of Robin Hood. Image by David Reed from Pixabay. Image in the public domain, CC 0.0 license.

WASHINGTON – It’s been a fairly dull day for US stocks Wednesday on Wall Street. Large cap stocks have struggled all day, while tech shares experience a continued resurgence. Meanwhile, on the legal front, the US Financial Industry Regulatory Authority (FINRA) has whacked Robinhood, the favored investment trading platform of naïve millennials, for exposing their low-information traders to unnecessary risks.

FINRA moves against Robinhood

Apparently, a substantial cadre of youthful Robinhood traders reimagine Wall Street as some kind of arcade game. These young guns are at least partially responsible for recent, outrageously wild moves in stocks like Tesla (TSLA). Or Tesla options, or similar fast-moving creatures of the exchanges. They seem to regard stocks and options as something similar to Vegas slot machines or the latest Call of Duty Black Ops wargame. They roll the alleged investing dice accordingly. Robinhood does much to incentivize them and little to inform them that investing is actually different from gambling. It’s all just great fun, right?

We’ve warned about Robinhood before in this column. So it’s good to see FINRA et. al. finally doing their jobs for a change. ZeroHedge reports Wednesday’s regulatory news in loving detail.

ZeroHedge reports

“Regulators in Massachusetts have filed a complaint against Robinhood alleging the company has “aggressively marketed to inexperienced investors and failed to implement controls to protect them,” according to a Wall Street Journal exclusive. (Likely behind a paywall, BTW.)

“The Massachusetts Securities Division filed the complaint and said that Robinhood ‘exposed Massachusetts investors to “unnecessary trading risks” by ‘falling far short of the fiduciary standard’ adopted by the state this year.”

Fiduciary responsibility? Rough translation: Robinhood seemed to encourage the fun of rolling the investing dice. But at the same time, they don’t emphasize the fact you can lose a lot of your money. That’s particularly true if you “play” options. At least according to the Bay State’s current definition of “fiduciary responsibility.”

First FINRA, now Massachusetts

“The complaint comes after Robinhood settled claims from FINRA for $1.25 million after the regulator alleged it didn’t take steps to ensure it was getting the best pricing for its customers. Robinhood, as we have noted numerous times, sells its order flow to make up for loss of revenue from commissions.

“The 20 page administrative complaint includes some stunning data, including that Robinhood approved 68% of Massachusetts residents who applied for options trading, despite the fact that they had ‘limited’ or ‘no’ investment experience.”

Holy cow. Back when I was a stockbroker, we were all pretty leery about signing inexperienced newbie investors up to roll the option dice. Sure, you can make ridiculous amounts of money trading options. Just like you can if you score all the cherries on quarter slot machines. (Personally, that’s why I almost never play the option game any more.)

Unless you’re either a pro or pretty good at trading volatile securities, odds still tend to favor the house. (Or high speed traders and supercomputers). Mainly because, if you trade really hot options – options that move considerably up or down every treading day – youhave to be a home gamer. Just like many Robinhood “investors.” If you can’t watch your options closely during the day — i.e., if you have a real job — you could lose your derrière rather quickly. Just like you can in volatile stocks like Tesla shares (NASDAQ: TSLA). I could tell you stories…

Back to ZH again

“The complaint also highlighted some of the rocket surgeons who are trading on Robinhood on a daily basis, including one customer who had ‘no investment experience’ but is now making ‘approximately 92 trades per day’ since February 2020 and another that started trading in April 2020 and has made ‘approximately 75 trades per day’ since then.”

Incredible. On a wild and crazy day here at my own computer, I’m lucky if I actually execute 5 or 10 trades. Usually less. Then again, I’m a “seasoned citizen” now, and confess to having made a few mistakes of my own back in the day. On the other hand, back in the day, you had to pay your full service broker at least $25-40 in trading commissions on both sides of the trade, which made you a bit more cautious. Today’s swaggering young dudes and dudettes don’t have to worry about no stinkin’ commissions anymore. Which makes things a bit faster and a bit more dangerous out there than they used to be.

Life is full of caveat emptor signals. You have to be on the lookout for them. And you have to respect the fact that you can always get screwed. Particularly by rich guys who want all your money, either via top-down socialism or by outright theft on the open market. At least FINRA and now Massachusetts have finally intervened in this particular outrage.

The Fed reports

In other financial news, the Federal Reserve dropped more news today. CNBC has a nice trio of bullet points that wrap up the essence of today’s rather benign news.

  • The Federal Reserve expects real gross domestic product to fall just 2.4% in 2020, compared to a decline of 3.7% predicted in September.
  • The Fed also upped its 2021 real GDP forecast to 4.2% from 4.0%.
  • The Jerome Powell-led Fed estimates the unemployment rate to fall to 6.7% this year, also an improvement from 7.6% projection in September.

In other words, nothing much to see here, folks. Except that our once (and perhaps future) President managed not only to bring the clobbered US economy back from the brink of death. But he also exceeded even the most optimistic comeback targets while inducing both big pharma and the FDA to get off their slow-rolling duffs and come up with a coronavirus vaccine before the end of this calendar year.

Not to worry, though. Biden will get the credit for this rousing success. But at least one recipient of the Pfizer vaccine has suffered some kind of nasty adverse reaction to the first injection. Always something.

Cloward-Piven anyone?

Frankly, we can expect some of this sort of thing from time to time. It’s not unusual when it comes to any kind of drug or vaccine, new or old. In essence, one size does not fit all, even when it fits most. That’s the human condition. In the main, we should be seeing the beginning of the end of the coronavirus terror. And hopefully, we’ll also soon experience the beginning of the end of the Blue State destruction of small businesses, an absolutely unnecessary and outright nasty goal of Blue State governors eager to impose a Cloward-Piven regime on America’s small business owners so they will soon cease to be.

Look it up, and consider yourselves forewarned.

Meanwhile, some semblance of a Santa Claus Rally appears to be happening, even if Wednesday’s edition is proving iffy as we close in on today’s snowy 4 p.m. ET closing bell on Wall Street.

I’ll be back with more tomorrow. Assuming I don’t suffer a coronary this afternoon, shoveling the heavy snow and slush piling up outside. Stuff always piles up here in The Swamp.

– Headline image: A statue of Robin Hood. Image by David Reed from Pixabay. Image in the public domain, CC 0.0 license.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17