State regulators fault Robinhood's wholly automated options and margin approvals

What happened?

Vermont's stipulation and consent order (docket 21-051-S) found that when a customer applied for Level 2 or Level 3 options trading or for margin, "Respondent's algorithms automatically, and nearly instantaneously, approve or reject the application" by comparing the customer's profile and answers to eligibility questions with the firm's requirements. Apart from account equity, all of that information was self-reported, and other than age and name it was not documented or manually reviewed for accuracy or internal consistency. The order states: "The approval process for options and margin trading, including repeat applications, is entirely automated."[2]

The order found that customers whose applications were denied "are immediately able to re-apply and may be approved if they change their account profile or responses to eligibility questions", and that before April 2020 Robinhood did not run a standardized check for inconsistencies when profiles changed. Robinhood asserted that it was not required to review self-reported information manually under FINRA rules, and that it had begun monthly reviews of options customers in April 2020 and weekly sample audits in May 2021. Announcing the settlement, the Department said the "wholly automated process was inadequate to determine which investors should be approved for high level option and margin trading", and that 809 Vermont customers had been approved for options trading and 581 for margin trading.[1][2]

The $640,000 Vermont settlement, a $590,000 penalty plus $50,000 for the state's investor education and restitution fund, also covered the March 2020 outages of Robinhood's app and website, during which customers could not enter, modify or cancel orders. The order required Robinhood to review and verify the information of Vermont customers approved for options since April 2021 after re-applying with different answers, and to report "any relevant changes Respondent has made or will make to its automated approval processes".[1][2]

A multistate task force coordinated by the North American Securities Administrators Association, led by regulators in Alabama, Colorado, California, Delaware, New Jersey, South Dakota and Texas, reached a settlement of up to $10.2 million in April 2023. California's consent order found that Robinhood "relied upon an algorithm that nearly instantaneously approves or denies the customer's option or margin trading application", with no principals or staff verifying applicants' self-reported information, and that denied customers could re-submit and be approved with different answers. The same order cited FINRA's 2021 finding that the firm had relied on "option account approval bots" with only limited oversight, and faulted its reliance on automated and bulk emails for customer support.[3][4]

When did it happen?

1. Mar 2020

   Robinhood's app and website suffer outages during historic market volatility; customers cannot enter, modify or cancel orders.[1][3]

2. Apr 2020

   Robinhood begins a monthly review of options customers to catch inconsistencies in their self-reported information, according to the state orders.[2][3]

3. May 2021

   Robinhood begins weekly sample audits of customers approved for options trading in the prior week.[2][3]

4. Mar 17, 2022

   Vermont's Department of Financial Regulation announces a $640,000 settlement covering the outages and the wholly automated options and margin approvals.[1][2]

5. Apr 6, 2023

   NASAA states announce a settlement of up to $10.2 million; California's DFPI enters its consent order citing the algorithm-based approvals.[3][4]

What was the impact?

• Financial: $640,000 (Vermont, including outage findings); up to $10.2 million (multistate, 2023) · ≈ $640,000[1][4]
• Customers: 809 Vermont customers approved for options trading and 581 for margin trading through the automated process[1][4]
• Other: No loss figure was attributed to the automated approvals themselves; the Vermont settlement also covered the March 2020 platform outages.[1][4]

Severity 3 of 5: A regulatory finding with monetary sanctions: Vermont's March 2022 stipulation and consent order ($640,000, which also covered platform outages) and a 2023 multistate settlement of up to $10.2 million both cited the automated options and margin approvals; no customer loss figure was attributed to the approvals themselves.

How did Robinhood Financial LLC respond?

In the Vermont order Robinhood asserted that FINRA rules did not require it to review self-reported information manually, and pointed to the monthly and weekly reviews it had added in 2020 and 2021. On the 2023 multistate settlement, Lucas Moskowitz, deputy general counsel and head of government affairs at Robinhood Markets, said: "We are resolving this matter with the states and are pleased to put it behind us," adding that the settlement related to past issues the company had since invested heavily in improving. Robinhood neither admitted nor denied the states' findings.[2][3][4]

What was the outcome, and did regulators act?

Vermont imposed a $590,000 penalty and a $50,000 fund contribution and required a review and verification of re-applicants approved since April 2021, plus a report on changes to the automated approval processes. The 2023 multistate settlement of up to $10.2 million resolved the same approval deficiencies together with the outage, customer-service and disclosure findings, and required Robinhood to share a FINRA-ordered compliance report with the settling states.[2][3][4]

1. DFR Reaches $640,000 Settlement with Robinhood Financial Over Platform Outages & Account Supervision official
   Vermont Department of Financial Regulation · Mar 17, 2022
   “The settlement also reflects the Department's finding that Robinhood's wholly automated process was inadequate to determine which investors should be approved for high level option and margin trading.”
2. In re Robinhood Financial LLC, Stipulation and Consent Order, Docket No. 21-051-S official
   Vermont Department of Financial Regulation · Mar 17, 2022
   “The approval process for options and margin trading, including repeat applications, is entirely automated.”
3. The Commissioner of Financial Protection and Innovation v. Robinhood Financial, LLC, Consent Order official
   California Department of Financial Protection and Innovation · Apr 6, 2023
   “Robinhood's automated account approval process allowed for customers that were denied option and margin trading to re-submit and be approved by utilizing different responses to the eligibility questions.”
4. Robinhood to pay states $10.2 million over outages prior to meme stock frenzy news
   InvestmentNews · Apr 6, 2023
   “Robinhood Financial agreed Thursday to pay up to $10.2 million in penalties to state securities regulators over outages on its platform in 2020 and lax approval of customers for risky trading that state officials say harmed investors.”