The Securities and Exchange Commission today charged Robinhood Financial LLC for failing to disclose that the firm received payments from trading firms that Robinhood routed customer orders to. The firm also failed to fulfill its duty of seeking the best reasonably available terms to execute customer orders. Robinhood agreed to pay $65 million to settle the charges.
According to the Commission, between 2015 and late 2018, Robinhood made misleading statements and omissions, including in FAQ pages on its website, about its largest revenue source when describing how it made money. Namely, the firm failed to disclose the payments from trading firms for Robinhood sending its customer orders to them for execution, also known as “payment for order flow.”
The SEC found that one of Robinhood’s selling points to customers was the “commission free” trading, but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at lower prices than other brokers. According to the US regulator, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. However, SEC determined that Robinhood provided lower trade prices that in total deprived customers of $34.1 million even after taking into account the savings from not paying a commission. Robinhood made these false statements during time in which the company was growing rapidly.
Stephanie Avakian, Director of the SEC’s Enforcement Division, commented:
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.
Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, added:
Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars. Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers.
Erin E. Schneider, Director of the SEC’s San Francisco Regional Office, said:
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.
Robinhood neither admitted or denied the SEC’s findings but 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. The company 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.
Experienced writer and journalist, working in the global online trading sector, Steffy is the Editor of LeapRate. She has previous experience as a copywriter and has been with the company since January 2020. Steffy has a British and American Studies degree from St. Kliment Ochridski University in Sofia.