When it rains, it pours! Only a day after a Massachusetts regulator filed a complaint against Robinhood accusing the popular trading app of aggressively marketing to inexperienced users and failing to implement controls against them, Robinhood has now agreed to pay a separate $65 million settlement after the Securities and Exchange Commission (SEC) charged the company over failing to properly inform users about the payments it received for handling their trades.
According to a statement released by the SEC, the case is based on disclosures from 2015 to 2018, which accuse Robinhood of making inaccurate statements and omitting information on the FAQ portion of its website regarding its biggest source of revenue – particularly receiving money from trading firms in exchange for its order flow. The trading app’s main selling point was that trading was “commission free,” but turns out that the company was instead making its copious amounts of revenue via excessively high payment for order flow rates.
Although payments for order flow among Wall Street firms is highly frowned upon, it is still within the realm of legality when conducted by electronic brokers. However in this case, Robinhood has been put on the chopping block because it is the app’s largest source of revenue, as the company made $180 million in the second quarter off trades. Moreover, the SEC order also accused Robinhood of issuing inferior trade prices that ended up costing users $34.1 million, even after the savings from not paying commission are considered.
Large market makers, such as Virtu and Citadel Securities, pay electronic brokers such as Robinhood to execute customer trades. In exchange, the broker receives a small payment for the shares that were transferred, which can quickly turn into millions when users trade in such volumes as they have been amid the pandemic. In response to the SEC order, Robinhood did not admit or deny wrongdoing, but noted that “the settlement relates to historical practices that do not reflect Robinhood today.”
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Information for this briefing was found via the SEC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
