Online Trading Apps Attract Regulator’s Scrutiny After Robinhood Binge

Online trading apps with game-like features are getting increased scrutiny from the U.S.’s top brokerage watchdog, adding to regulatory headaches for Robinhood Markets and other firms that played key roles in last month’s frenzied buying of GameStop Corp.

The Financial Industry Regulatory Authority laid out its beefed-up focus on apps in its annual exam priorities, saying it would be closely monitoring how brokerages disclose potential risks and supervise their customers’ use of online trading tools, which have been embraced by an army of retail investors during the coronavirus pandemic.

“This focus includes risks associated with app-based platforms with interactive or ‘game-like’ features that are intended to influence customers, their related forms of marketing, and the appropriateness of the activity that they are approving clients to undertake,” Finra, which is funded by the brokerage industry, said in the Feb. 1 report.

The heightened attention comes as Robinhood’s wildly-popular trading platform draws intense criticism from consumer advocates and some lawmakers over GameStop’s remarkable surge and crash. Detractors argue that the nudges incorporated into apps inappropriately encourage customers to keep trading and may straddle the line of providing stock recommendations, which would subject firms to tighter rules.

Robinhood vehemently denies that it provides recommendations. If Robinhood was found to be offering advice, it would trigger a series of obligations, including that the firm act in the best interest of its customers.

Robinood didn’t immediately respond to a request for comment.

The Securities and Exchange Commission is also examining how brokerages handled increased trading volumes during the January tumult and firms’ decisions to restrict buying of GameStop and other stocks. The regulator is looking into whether brokerages complied with rules and were consistent in how they made disclosures to their clients.

Robinhood has repeatedly said that it limited some customer orders last week and sought billions in dollars from its investors because the Depository Trust & Clearing Corp. dramatically raised capital requirements. The DTCC is charged with overseeing the plumbing of stock trading.

While Finra didn’t name any specific firms in its report, it laid out a number of considerations that brokerages with interactive and “game-like” features should evaluate, including:

  • If communications with clients amount to a “recommendation” and, if so, whether firms are acting in a customer’s “best interest.”
  • Whether disclosure of risks, fees and costs are sufficient.
  • Whether firms need to improve or create systems to supervise “game-like” communications with customers.
  • Whether firms are doing enough to prevent false, misleading or exaggerated statements.
  • Whether firms are appropriately supervising customers’ options trading and the opening of new accounts.

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