According to FINRA, Interactive Brokers LLC was censured and fined $650,000 for failing to exercise reasonable due diligence when approving self-directed customers to trade options.

The firm used a primarily automated process to approve or disapprove options trading requests. When customers did not meet eligibility criteria, the system initially displayed error messages that revealed the specific criteria needed to qualify. The firm later changed the messaging but still indicated which category of eligibility criteria customers did not meet.

Crucially, the firm allowed customers to change their account profile information without restriction on frequency. When customers updated their profiles, the firm did not compare the new information to previously submitted data. This meant the firm failed to detect instances where customers submitted inconsistent information about their options trading experience.

The firm approved certain customers for options trading despite red flags indicating options trading may not have been appropriate for them.

Additionally, the firm failed to keep required records of options trading disapprovals. When customers received pop-up screens or error messages denying their options applications, the firm did not preserve records of these disapprovals or when they occurred.

The firm has since begun implementing a process to retain records of all disapprovals.

For investors, this case highlights the importance of options trading approvals. Options are complex instruments that can result in significant losses. Broker-dealers are required to exercise due diligence in determining customer suitability for options. When approval systems can be gamed by simply changing profile information, investors may gain access to products unsuitable for their experience level and risk tolerance.