Today – The Securities and Exchange Commission charged Robinhood Financial LLC for repeatedly misstating and failure to disclose the firms receipt of payments from customer orders, failing to satisfy its duty to seek the best reasonably available terms to execute customer orders and fined them $65 Million.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm… Brokerage firms cannot mislead customers about order execution quality.”Stephanie Avakian, Director of the SEC’s Enforcement Division
Essentially, Robinhood made a good chunk of money by ‘skimming off the top’ of each transaction. If you purchased a stock for $1, they purchased it for something less and then sold it to you for $1.
To the end user, I paid a dollar and received a dollar worth but to the financial institution – you can make a lot of money off using other peoples money.
“There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money … But innovation does not negate responsibility under the federal securities laws.”Erin E. Schneider, Director of the SEC’s San Francisco Regional Office
While this is not illegal and many electronic brokerages do similarly – Robinhood willfully omitted these facts which created a level of deception that the SEC fined them for.
According to the SEC’s order, between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money – namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as “payment for order flow.”SEC.Gov
One of the main selling points for millennial and ‘new wave’ investors was the commission free advantage, effectively removing the bar to entry that has been a ‘standard’ for decades.
The SEC Order found that Robinhood provided inferior trade prices that deprived customers of $34.1 Million after taking into account the savings provided by the commission free offering.
Without agreeing to or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 as well as the recordkeeping provisions of the Securities Exchange Act of 1934. A civil penalty of $65 Million was imposed.