Interactive Brokers Fined $2.25 Million for Free-Riding Violations
By Staff
The Financial Industry Regulatory Authority announced that it has censured and fined Interactive Brokers, LLC, a leading online brokerage firm, $2.25 million for failing to prevent customers from engaging in “free-riding.”
According to FINRA, from October 2015 to December 2022, Interactive Brokers failed to detect 4,229,709 instances of free-riding – the buying and selling of securities before paying for them – in options and issued options by customers with cash accounts. The firm’s automated surveillance system inadvertently did not monitor for free-riding in these types of securities. As a result, Interactive Brokers did not freeze the accounts of customers who engaged in free-riding, as required by Regulation T, which, among other things, requires that broker-dealer customers using cash accounts pay for the purchase of a security in full before selling it.
Free-riding is a violation of Regulation T that occurs when an investor buys and sells a security without paying for it. This can happen when an investor uses the proceeds from the sale of a security to pay for the purchase of the same security. For example, an investor might buy 100 shares of stock on Monday and then sell those shares on Tuesday before paying for them. The investor would then use the proceeds from the sale to pay for the purchase and could potentially earn a profit. Free-riding is prohibited because it can give investors an unfair advantage over other market participants. It can also lead to losses for brokerage firms if the investor is unable to pay for the purchase.
In addition to the fine and the censure, Interactive Brokers has agreed to update its supervisory procedures to prevent future violations. FINRA did report that, in January 2023, the firm updated the programming of its free-riding surveillance to include options and issued options and issued “cash up front” restriction notices to customers who had engaged in free-riding in the prior 90 days.
Interactive Brokers consented to the sanctions without admitting or denying the claims.
As reported previously by The DI Wire, Interactive Brokers was one of the 10 firms fined by the SEC in its ongoing crackdown on private electronic communications.
Interactive Brokers, LLC offers online trading through self-directed accounts and clears transactions for retail and institutional customers. The firm is headquartered in Greenwich, Conn. and employs approximately 390 registered representatives in seven branch offices.
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