DECEIVING CUSTOMERS: Robinhood Gets Busted by SEC for Misleading Users

Posted on 12/17/2020

The Securities and Exchange Commission (SEC) charged Robinhood Financial LLC for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders. Robinhood agreed to pay US$ 65 million to settle the charges. Silicon Valley start-up Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm. Under U.S. law, brokerage firms cannot mislead customers about order execution quality. The stock trading app is used heavily by the younger U.S. population for its ease of use and gamification tactics.

The stock trading app is best known for pioneering the “commission-free trading.” Robinhood and its online brokerage industry peers rely on what’s known as payment for order flow as their profit center instead of commissions. Selling order flow is a legal practice done by most electronic brokers. Robinhood received US$ 180 million in payments for trades in the second quarter of 2020, according to an SEC filing.

The press release states, “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.” As the SEC’s order finds, one of Robinhood’s selling points to customers was that trading was “commission free,” but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Despite this, according to the SEC’s order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. Robinhood made these false and misleading statements during the time in which it was growing rapidly.”

The press release adds, “Without admitting 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 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty. Robinhood also agreed to retain an independent consultant to review its policies and procedures relating to customer communications, payment for order flow, and best execution of customer orders, and to ensure that Robinhood is effectively following those policies and procedures.”

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