According to FINRA, Interactive Brokers, LLC was censured and fined $2,250,000 for failing to detect customers with cash accounts who engaged in free-riding in options and issued options.

Free-riding occurs when customers buy and sell securities before paying for them, essentially using the proceeds from a sale to pay for a prior purchase. When free-riding is detected, firms are required to impose a 90-day freeze on the account, during which the customer must pay in full for any securities purchases at the time of the trade.

The firm relied on automated surveillance to monitor customer cash accounts for free-riding. However, the firm inadvertently failed to program its surveillance system to monitor for free-riding in options and issued options. As a result, the firm did not identify free-riding transactions in options and did not impose the required 90-day freezes or require payment in full for subsequent purchases.

FINRA found that the firm's internal description of its surveillance system stated that cash accounts would be monitored for free-riding, but the list of securities products subject to surveillance failed to include options. The firm also failed to conduct any audit or testing of its free-riding automated surveillance system.

The firm's written supervisory procedures lacked provisions relating to the requirement to impose 90-day freezes on customer cash accounts that engage in free-riding.

The firm has updated its surveillance programming to include options, issued cash up front restriction notices to affected customers, and revised its procedures.

This case demonstrates the importance of comprehensive testing of automated surveillance systems to ensure they cover all relevant products and scenarios.