RobinHood bosses began hiding their sources of revenue after a “best-selling author” published a book outlining their practices as allegedly harming inexperienced investors, U.S. regulators reported.
2014 by Michael Lewis Flash Boys: A Wallstreet Revolt, which was not specifically named by the Securities and Exchange Commission (SEC), allegedly left the heads of the popular financial trading app treading information online about their business model.
The SEC said the company made the moves after “a best-selling author published a book.”
Lewis’ book detailed how the stock market is influenced by high-frequency traders, including the controversial practice of selling securities to Wall Street brokers, known as “payment for order flow.”
The SEC claims that Robinhood began masking the fact that “pay-per-order” flows accounted for 80% of its revenue from its launch in 2015 through mid-2016.
The bosses allegedly believed that making the source of revenue public could defer customers and remove a section of frequently asked questions online titled “How does Robinhood make money?” Market Insider reported.
A new FAQ page claimed that “pay-per-order” revenue was “indirect” and “insignificant,” according to the SEC complaint.
Author Michael Lewis, who appears in an undated advertising photo, wrote Flash Boys: A Wall Street Riot in 2014, which detailed controversy over Robinhood’s business model and caused app managers to remove revenue sources from their website
Lewis ’book was not specifically named by the SEC, which referred to a“ best-selling author who published a book ”in 2014 detailing scandals in high-frequency trade in the U.S.
The Securities and Exchange Commission on Thursday charged the popular Robinhood stock trading app for repeated misstatements that did not reveal the receipt of payments from the firm by trading companies to place customer orders with them. They will pay a $ 65 million fine
The complaint is the latest revelation of the SEC’s enforcement action against the company.
On Thursday, Robinhood revealed they would pay $ 65 million to settle charges that deceived customers for their sources of revenue and that they were unable to deliver the best execution of operations as promised, regulators said on Thursday. United States values.
The Securities and Exchange Commission said in an order that the app was directing orders to commercial companies that overcharged users to execute transactions between 2015 and the end of 2018.
The SEC said it resulted in $ 34.1 million in higher customer commissions the company made incorrect statements to customers about these practices.
Robinhood agreed to pay the civil penalty Thursday without admitting or denying the SEC’s findings.
It comes just a day after Massachusetts regulators claimed popular applications and manipulated inexperienced investors.
Robinhood has grown in popularity during the pandemic as it announced the lack of business commissions in communications with customers.
Still, the SEC on Thursday found in its statement that such communications had not always been honest, and that customers lost tens of millions of dollars as a result.
“Between 2015 and the end of 2018, Robinhood made misleading statements and omissions in communications with customers, including the frequently asked pages of its website, about its largest source of revenue in describing how it made money, is that is, payments from commercial companies in exchange for Robinhood sending its customer orders to those companies for execution, also known as “payment for order flow,” was referred to in the SEC statement.
One of Robinhood’s selling points to customers was that the trade was ‘commission free’, but due in large part to its unusually high payment for order flows, orders from Robinhood customers were executed at prices lower than other runners “. it continued.
According to CNBC, Robinhood earned $ 180 million with second-quarter operations.
SEC chief of staff Stephanie Avakian in the photo issued the order Thursday
“Robinhood provided misleading information to customers about the actual costs of choosing to negotiate with the company,” said Stephanie Avakian, SEC chief executive.
“Brokerage firms cannot mislead customers about the quality of order execution.”
However, Robinhood argued that it has improved its customer disclosure and negotiation execution processes from the period to the end of 2018 discussed in the SEC order.
“The agreement relates to historical practices that today do not reflect Robinhood,” said Dan Gallagher, Robinhood’s legal director.
“We recognize the responsibility that comes with helping millions of investors make their first investments and we are committed to continuing to evolve Robinhood as we grow to meet the needs of our clients.”
However, the company agreed to pay the fine without admitting or denying the findings.
He also agreed to retain a consultant to review his processes, including communications with clients.
Robinhood revealed some information about the payments in a securities presentation, but omitted it from its website “because it believed the payment of the order flow could be considered controversial by customers,” said the SEC order, which added that Robinhood directed customer support staff not to disclose payments when asked about Robinhood’s source of revenue.
SEC action comes amid intense Robinhood scrutiny following the suicide of a young trader earlier this year.
Dan Gallagher, Robinhood’s legal director, said the company has changed its practices
On Wednesday, the state of Massachusetts also initiated an administrative proceeding against the application, alleging that it had attracted inexperienced users and allowed them to trade risky instruments as options without proper education.
The complaint also accuses Robinhood of having maintained a platform that worked properly as it exploded its number of users, after several platform crashes earlier this year that prevented trading operations even when markets were in agitation.
Commonwealth Secretary William Galvin filed an administrative complaint alleging that Robinhood violated securities laws by aggressively marketing Massachusetts investors “without regard to the best interests of its clients.”
“Treating it like a game and attracting young, inexperienced customers to do more and more business is not only unethical, but well below the standards we demand in Massachusetts,” Galvin said in a statement.
The complaint also accuses Robinhood of having maintained a platform that worked properly as it exploded its number of users, after several platform crashes earlier this year that prevented trading operations even when markets were in agitation.
In a statement, the Menlo Park, California-based company said it disagrees with the complaint and intends to defend itself strongly.
Robinhood said it has “made significant improvements to our range of options, adding guarantees and improved educational materials.”
“Millions of people have made their first investments through Robinhood and we stay focused continuously on serving them,” the company said.
The complaint seeks an unspecified fine against Robinhood and an order forcing the company to hire an external consultant to review its platform, infrastructure and policies and procedures, among other sanctions.
According to CNBC, the Silicon Valley startup plans to go public in the future.
It has raised more than $ 1 million in 2020, giving it a $ 11.7 billion valuation, following an increase in users caused by the coronavirus pandemic and subsequent blockages.
They reported a record three million new users in the first four months of the year.
Robinhood has nearly half a million customers in Massachusetts alone, with accounts valued at more than $ 1.6 billion.