The Securities and Exchange Commission on Thursday accused Robinhood of misleading customers about how the stock trading app makes money and failing to deliver the best promised execution of trades.
Robinhood agreed to pay a $ 65 million civil penalty, without admitting or denying the SEC’s findings. A company attorney said the practices “today do not reflect Robinhood.”
The Silicon Valley start-up, which plans to go public, has raised more than $ 1 billion by 2020, raising Robinhood’s valuation to $ 11.7 billion.
“Between 2015 and the end of 2018, Robinhood made misleading statements and omissions in communications with customers, including its website’s frequently asked questions pages, about its biggest source of revenue in describing how it made money, it’s a say, payments from commercial companies in exchange for Robinhood sending its customer orders to those companies for execution, also known as “order flow payment,” the SEC said.
One of Robinhood’s selling points for customers was that the trade was ‘commission free’, but due in large part to its unusually high payment for order flows, Robinhood’s customer orders were executed at prices below of other intermediaries “adds the statement.
The millennial-favored trade application is best known for being a pioneer in “commission-free trade.” Robinhood and the rest of the online brokerage industry rely on what is known as payment for order flow as a profit engine rather than commissions.
Taking payments for order flow from Wall Street companies is a controversial but legal practice, done by most e-brokers. For Robinhood, it is the largest source of income. Robinhood received $ 180 million in payments for operations in the second quarter, according to an SEC filing.
The SEC order determined that Robinhood provided lower commercial prices that cost customers $ 34.1 million, even after considering the savings of not paying a commission.
“Robinhood provided misleading information to customers about the actual costs of choosing to negotiate with the company,” said Stephanie Avakian, director of the SEC’s enforcement division. “Brokerage firms cannot mislead customers about the quality of order execution.”
Market makers like Citadel Securities or Virtu pay e-brokers like Robinhood the right to run client transactions. The broker is paid a small commission for the actions they take, which can add up to millions when customers operate as actively as they have done this year.
Robinhood has experienced record growth in 2020 due to the unprecedented market volatility of the Covid-19 pandemic. Robinhood recorded a record 3 million new customers during the first four months of 2020.
“The agreement relates to historical practices that today do not reflect Robinhood,” said Dan Gallagher, Robinhood’s legal director at Robinhood. “We recognize the responsibility of helping millions of investors make their first investments and are committed to continuing to evolve Robinhood as we grow to meet the needs of our clients.”
A Robinhood spokesman added: “We are fully transparent in our communications with customers about our current revenue streams, have significantly improved our best execution processes, and established relationships with other market leaders to improve execution quality. ”
The SEC charges came a day after Massachusetts regulators filed a complaint accusing the commercial application of predatory marketing of inexperienced investors.
The complaint cites Robinhood’s “aggressive tactics for attracting inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to avoid interruptions and frequent disruptions to its trading platform.”
– with reports from CNBC’s Kate Rooney.
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