(Westlaw). Interactive Brokers LLC has agreed to pay more than $2.2 million in fines to resolve allegations by the Financial Industry Regulatory Authority that it failed to restrict customers that engaged in a prohibited trading practice.
The settlement announced Dec. 30 resolves allegations that IB’s surveillance system did not monitor cash accounts for “free-riding” in options over more than seven years.
Free-riding is the act of buying securities in a cash account and selling them before the purchase settles and payment becomes due. Under Regulation T of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 220.8, broker-dealers must require a customer that has engaged in free-riding to pay for securities it purchases on the trade date, rather than the settlement date, FINRA said.
The self-regulator alleged that IB used an automated system to monitor cash accounts for free-riding since October 2015.
The system, however, was not programmed to surveil options trading, and IB failed to detect more than 4.2 million free-riding transactions through December 2022, FINRA said.
The error allowed more than 20,000 customers to avoid restrictions for free-riding violations, according to the self-regulator.
IB updated its system in early 2023 and issued restriction notices to customers who had engaged in free-riding in the previous 90 days, FINRA said.
