The Middletown Press (Middletown, CT)
Interactive Brokers fined $1.75M
U.S. futures regulator said customers suffered $82.6M in trading losses
GREENWICH — Online brokerage Interactive Brokers Group will pay a civil penalty of $1.75 million to settle charges over its alleged failure to prepare its electronic trading system for a historic plunge last year in the value of oilfutures contracts that led to tens of millions of dollars in customer losses, the federal Commodity Futures Trading Commission announced.
Greenwich-based Interactive Brokers’ supervisory failures were discovered on April 20, 2020, according to the CFTC. That day, certain U.S. crude-oil futures traded at negative prices for the first time amid plummeting oil demand as the COVID-19 pandemic hammered the global economy.
Oil futures are broadly defined as contracts in which there is an agreement to exchange an amount of oil at a set price on a certain date. They are traded on exchanges and reflect the demand for various oil types.
“Interactive Brokers failed to deploy necessary system changes before negative prices occurred resulting in two significant systems issues on April 20, 2020,” the CFTC said in its announcement Tuesday. “Negative prices were not displayed to customers, and customers were unable to place orders with negative-priced limit orders to buy or sell.”
The CFTC also found that “internal minimum margin requirements were not correctly enforced prior to trade execution for trades” in a certain contract.
Those issues affected hundreds of accounts, with customers incurring trading losses on April 20, 2020, that exceeded $82.57 million, according to the CFTC.
“This enforcement action demonstrates that the CFTC will hold registrants responsible for their handling of customer accounts and ensuring the integrity of trades on their trading platforms and electronic systems, including during instances of market volatility,” Vincent McGonagle, the CFTC’s acting director enforcement, said in a statement.
The CFTC said its order “recognizes Interactive Brokers’ substantial cooperation and systems remediation in the form of a reduced civil monetary penalty.”
Interactive Brokers said in a statement that it extensively tested its systems and started implementing “necessary coding changes” ahead of April 20, 2020, but that it was “not able to fully deploy new software” before crude oil futures traded in negative territory. After April 20, 2020, the company said it “promptly put in place measures to ensure that our systems are prepared for similar negative-pricing of futures products going forward.”
Shortly after the negative-pricing disruption, IBKR said that it voluntarily made payments of more than $102 million to customers it determined were potentially impacted by the systems issues.
Alongside the penalty, the CFTC’s order requires Interactive Brokers to pay restitution of $82.57 million to its customers. But the agency said that the company “is credited the full restitution” due to its compensation to customers.
“IBKR is proud of its history of developing and maintaining state-of-the-art electronic systems for our customers to access securities and futures markets around the globe,” the company added in its statement. “We are pleased to resolve this matter and pleased that the CFTC recognized our proactive compensation of our affected customers (exceeding our restitution obligation) and substantial cooperation in reaching this settlement.”
Last year, in a separate case, Interactive Brokers agreed to pay a total of $38 million in penalties to three federal agencies — including $11.5 million to the CFTC — to settle charges that it did not report suspicious trading activity and failed in its anti-moneylaundering oversight for several years.
Interactive Brokers ranked as the No. 848 company on this year’s Fortune 1,000 list. In the first quarter of this year, its number of customer accounts jumped 74 percent year over year to about 1.3 million. The trend reflects a surge in trading among retail investors since the start of the pandemic.