The Securities and Exchange Commission on Thursday charged Robinhood with deceiving customers about how the stock trading app makes money and failing to deliver the promised best execution price for trades.
Robinhood agreed to pay a $65 million civil penalty, without admitting or denying the SEC's findings. The Silicon Valley start-up, which has eventual plans to go public, has raised about $800 million in funding in 2020, which has lifted its valuation to $11.2 billion.
“Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars,” said Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, in a statement. The “action sends a clear message that the commission will not allow brokers to ignore their obligations to customers.”
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, through payments from trading firms. In exchange, Robinhood sent customer orders to those firms for execution. The practice is also known as “payment for order flow.”
One of Robinhood’s selling points to customers was that trading was “commission free,” but largely because of its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices, according to the SEC.
The SEC said the inferior trade prices in aggregate deprived customers of $34.1 million, even after the savings from not paying a commission. Robinhood made these false and misleading statements during the time in which it was growing rapidly, the agency claimed.
“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.”
It's been a huge year for Robinhood. The free trading app has seen an explosion in popularity as people stuck at home try their luck buying and selling stocks—paving the way for the start-up to weigh a big public offering sometime next year.
But regulators are increasingly concerned about its business model, accusing Robinhood of failing to protect rookie traders and encouraging risky behavior.
Massachusetts officials alleged Wednesday that the company violated state law by attracting inexperienced investors with gaming elements like colorful confetti celebrating trades and other aggressive marketing techniques. They also said Robinhood failed to safeguard its system after explosive growth led to dozens of outages and disruptions in 2020.