The Securities and Exchange Commission accused Robinhood Thursday of deceiving clients about how the stock trading app makes money and failing to deliver the promised best execution of trades.
Robinhood agreed to pay a civil penalty of $ 65 million without admitting or disapproving the SEC findings. A company attorney said the practices "do not reflect Robinhood today".
The Silicon Valley startup, slated to go public, raised more than $ 1 billion in funding in 2020, raising Robinhood's valuation to $ 11.7 billion.
"Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including on its website's FAQ pages, about its greatest source of income when it comes to how it makes money – namely, payments from trading companies in exchange for Robinhood, the its client sends orders to these firms for execution, also known as "payment for order flow," "the SEC said.
"One of Robinhood's selling points to customers was that the trade was' commission free ', but in large part due to the unusually high payment for order flow rates, Robinhood customers' orders were being executed at prices below those of others Brokers were lying. " added the statement.
The millennial trading app is best known for its pioneering work in "commission-free trading". Robinhood and the rest of the online brokerage industry rely on what is known as payment for the flow of orders as a profit engine instead of commissions.
Receiving payments for the flow of orders from Wall Street firms is a controversial but legal practice practiced by most electronic brokers. It's the greatest source of income for Robinhood. Robinhood received $ 180 million in payments for trades in the second quarter, according to an SEC filing.
The SEC contract found that Robinhood provided substandard retail prices that cost customers $ 34.1 million, even after taking into account the savings from not paying a commission.
"Robinhood provided customers with misleading information about the real cost of opting to trade with the company," said Stephanie Avakian, director of the SEC's enforcement division. "Brokerage firms cannot mislead customers about the quality of job execution."
Market makers like Citadel Securities or Virtu pay e-brokers like Robinhood for the right to conduct client trades. The broker then receives a small fee for the routed stocks, which can add up to millions if customers trade as actively as they did this year.
Robinhood saw record growth in 2020 due to unprecedented market volatility due to the Covid-19 pandemic. Robinhood saw a record 3 million new customers in the first four months of 2020.
"The settlement relates to historical practices that do not reflect Robinhood today," said Dan Gallagher, Robinhood's chief legal officer, Robinhood. "We recognize the responsibility that comes with helping millions of investors make their first investments and we are determined to continue developing Robinhood as we grow to meet our clients' needs."
A Robinhood spokesperson added: ""We are completely transparent in our communication with customers about our current sources of income, have significantly improved our best execution processes and established relationships with other market makers in order to improve the quality of execution. "
The SEC's indictment came a day after Massachusetts regulators filed a complaint alleging the trading app of predatory marketing to inexperienced investors.
The complaint cites Robinhood's "aggressive tactics to attract inexperienced investors, his use of gamification strategies to manipulate customers and his failure to prevent frequent outages and disruptions on his trading platform".
– with reports from Kate Rooney of CNBC.
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