Interactive Brokers Settles Free-Riding Case for $2.25M

Interactive Brokers settles free-riding case with FINRA, agreeing to pay a $2.25 million fine over allegations of free-riding transactions in customer cash accounts. The settlement resolves the issue without Interactive Brokers admitting or denying FINRA’s findings. 

The broker, a member of FINRA since 1995, accepted a Letter of Acceptance, Waiver, and Consent (AWC) as part of the agreement, which also includes a censure. The violations occurred between October 2015 and December 2022, during which Interactive Brokers failed to detect more than 4.2 million instances of free-riding. 

Free-riding is a practice where securities are bought and sold without full payment, violating the Federal Reserve Board’s Regulation T and FINRA’s Rules 4210 and 2010. According to FINRA, the firm’s automated surveillance system failed to identify free-riding activity in options and issued options transactions and failed to impose required account freezes on individuals engaging in such transactions. 

Interactive Brokers Settles Free-Riding Case for $2.25M

Further investigation revealed deficiencies in the firm’s supervisory systems and written supervisory procedures (WSPs), which lacked adequate measures to ensure compliance with regulations to prevent free-riding. 

Interactive Brokers has updated its surveillance systems and WSPs to address these shortcomings and improve regulatory compliance as part of the settlement. This settlement marks the matter’s conclusion, with the firm waiving its right to pursue additional procedural steps. 

FINRA will include the disciplinary action in its public records. At the time of writing, Interactive Brokers had not responded to requests for comment on the development. The settlement follows a similar action earlier this year, when FINRA fined tastytrade, a retail trading platform, $30,000 for failing to properly supervise employees’ outside securities accounts between July 2021 and June 2023. The firm had not conducted timely reviews of several accounts, highlighting ongoing challenges in supervision across the industry.

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