“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said Stephanie Avakian, director of the SEC’s Enforcement Division. “Brokerage firms cannot mislead customers about order execution quality.”
“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,” the statement added.
The millennial-favored trading app, which is best known for pioneering the “commission-free trading,” like the rest of the online brokerage industry, rely on what’s known as payment for order flow as their profit engine in lieu of commissions.
Taking payments for order flow from Wall Street firms is a controversial, but legal practice done by most electronic brokers. For Robinhood, it’s the biggest revenue source.
The SEC’s Financial Industry Regulatory Authority (Finra) also fined Robinhood $57 million for poor oversight, misleading its clients, and a failure to judge client suitability when it comes to options trading. Finra also instructed the Menlo Park, Calif.-based discount brokerage to pay an estimated $12.6 million to aggrieved clients.