Fidelity Brokerage Services Settles Charges with Massachusetts Securities Regulators

Fidelity Brokerage Services has agreed to pay $750,000 as part of a settlement with Massachusetts securities regulators. The regulators alleged that the firm had a lenient application process for retail investors looking to trade options on its platform.

Although Fidelity settled the matter without admitting or denying the allegations, the company stated that it fully cooperated with the state’s investigation. Furthermore, Fidelity has taken steps to improve its screening process for investors interested in trading options.

The Massachusetts Securities Division, led by Secretary of the Commonwealth William Galvin, recognized Fidelity’s efforts in making enhancements to its options application process since January 2022 when the complaint was initially filed.

Despite acknowledging these improvements, Galvin criticized Fidelity's past practices as "halfhearted and lackadaisical." He argued that the firm's approval of inexperienced investors for options trading, which he referred to as "rubber stamping," put consumers at risk by allowing them to engage in risky trading activities.

The Risks and Loopholes of Options Trading

Options trading is an investment strategy that has its own set of risks and complexities. According to the Securities Division, this form of trading is particularly risky due to the intricate nature of options, their lack of liquidity, and the need to accurately predict short-term price fluctuations in the underlying asset.

To mitigate these risks, brokers assess the suitability of investors for different levels of options trading. Factors such as income, net worth, trading experience, and general knowledge of investing are taken into account to determine whether an investor is suitable for options trading.

However, a recent case involving Fidelity highlights a loophole in the system that allowed retail investors to manipulate the application process. The state alleges that these investors were able to game the system by submitting multiple applications with slightly altered information until they were granted access to Fidelity's platform for options trading.

Fidelity had an application-review process in place to assess the financial situations and investment experience of retail traders. This process was used to determine whether traders qualified for options trading. Prior to June 22, 2021, there were no limitations on the number of applications a client could submit to Fidelity's Central Review Team. Moreover, members of the review team had the ability to look back at Fidelity's system to check for previous applications but were not required to do so.

As a result, clients were able to exploit this loophole by resubmitting applications with inflated financial information or investment experience that differed significantly from their previous applications. This allowed them to gain access to Fidelity's platform for options trading.

This case highlights the need for tighter regulations and stricter monitoring of options trading application processes. By closing these loopholes, the investment community can ensure a more transparent and fair trading environment for everyone involved.

Fidelity's System Enhancements for Access to Trade Options

Fidelity has implemented several improvements to its system in order to ensure that only qualified investors can access and trade options. These enhancements include the implementation of limits on the number of applications a retail client can submit.