FINRA Action: Interactive Brokers hit with $3.5M fine for price violations

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FINRA, an acronym for Financial Industry Regulatory Authority, works for investors and firms, enabling them to participate in trading practices safely. In order to regulate member brokerage firms and exchange markets, FINRA has the support of technology and expertise.

Interactive Brokers is a trading company that offers customers a wide range of products. Its services span retail and institutional traders in all the authorized regions. However, the prominent brokerage firm is now under the scrutiny of FINRA and accused of engaging in violations that affect customers.

Interactive Brokers price violations

Simply put, violations of any kind in the brokerage sector are bad for customers and the firm. For one, it affects how much profit a customer earns. Second, the firm loses the confidence and trust of its community members. Thereby, it hampers personal growth and that of the industry.

What Interactive Brokers has done can be understood from four different points of view.

• IB, Interactive Brokers, has failed to include all relevant execution quality factors regularly. Also, IB has been unable to assess competing venues to ensure it has the best execution obligations in the prevailing market conditions.
• IB has failed to assess if the practice of routing has affected the execution quality of its customers. Routing adjustments pertain to nonmarketable equity and options, specifically at the end of select months. It serves as a key function to determine the receipt of rebate payments based on volumes.
• IB has failed to disclose crucial pieces of information about what kind of relationship it shares with the market where it has routed orders during the 3-year period.
• The failure of Interactive Brokers to review net trading activity has allegedly affected more than 10.4 million customer transactions. Ideally, this is done to ensure that IB does not interfere with best execution obligations.

Charges put up by FINRA are for the period starting in January 2014 and ending in February 2023. Every FINRA action will now be undertaken to help customers who have been affected by these violations. IB has a fine of $3.5 million for price violations.

A statement by the firm highlights that FINRA has not mentioned any allegation or finding in the settlement order, adding that there is no need to change its smart order routing logic.

FINRA’s investigation and findings

FINRA and Interactive Brokers have locked horns because of what the regulatory authority has found out about it. An investigation was conducted, ending with findings that reviews of the firm from January 2014 to November 2016 were ad hoc, further stating that reviews were not adequately documented and had no consistent consideration for execution quality factors.

Next, FINRA has found from its investigation that Interactive Brokers is at fault for not rectifying deficiencies in its system for price improvement opportunities. It goes on to add a faulting deficiency in routing to third parties for net trading.

A failure to consider relevant compliances adds to Interactive Brokers’ price violations.  FINRA has found that its supervisory system has been poorly designed to achieve compliance with best execution obligations.

A fine on Interactive Brokers paints a gloomy picture of its reputation. The trading platform is now out in the open with all the deficiencies and non-compliance it has shown in recent years.

Moreover, it signifies an additional expense of $3.5 million to be undertaken as a fine. Any expense that an organization is not expecting ends up hitting its bottom line.

Conclusion

The future outlook of Interactive Brokers is below average in the short term. The trading firm may eventually navigate its way to success; however, customers would have lost a lot of interest in the platform by then. It will take months for Interactive Brokers to repair a $3.5 million fine for price violations by FINRA.

It is obvious that IB may leverage its industry image to get back on its feet. Interactive Brokers has been a member of FINRA since 1995 and has served its customers some pretty good numbers over the years.