SEC says Robinhood had misled customers
The Securities and Exchange Commission on Thursday said that Robinhood, the stock trading app, had misled its customers about how it was paid by Wall Street firms for passing along customer trades, the latest enforcement action against the popular platform.
Robinhood agreed to pay a $ 65 million fine to settle the charges, the latest blow to the company whose popularity has surged since its founding, offering commission- free trading and an easytouse app. Critics have said that the company relied on practices that hurt its rapidly growing base of customers, who tend to be younger and less experienced.
The charges announced Thursday apply to Robinhood’s disclosures from 2015 to late 2018, the regulator said.
The SEC had charged Robinhood with “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,” it said in a statement.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” Stephanie Avakian, director of the SEC’s enforcement division, said in a statement. “Brokerage firms cannot mislead customers about order execution quality.”
As part of the settlement, Robinhood did not admit or deny the allegations. But Dan Gallagher, its chief legal officer, said that the company was committed to helping meet its customers’ needs. “The settlement relates to historical practices that do not reflect Robinhood today,” he said in a statement.
Millions of investors have turned to Robinhood in recent years, lured by the simple fact that the site allows investors to trade without paying commissions. Much of the retail brokerage industry has since followed suit, resulting in a surge of retail trading activity this year.
Because they do not charge commissions, brokerage firms such as Robinhood make money by charging highspeed trading firms for the right to execute their clients’ orders, a practice
called payment for order flow. The trading firms are willing to pay Robinhood because they can eke out incremental gains on individual trades, which because of their speed and scale add up to large amounts of money.
But that also means that the high- speed trading firms determine the price one of Robinhood’s clients would pay for shares or what they might receive for selling stock.
The SEC said that for several years, the company had failed to be transparent with customers about its use of payment for order flow.
It also said that the brokerage firm had violated a duty to get customers the best possible prices for their orders, tying that failure to the high payment rates it received from trading firms in exchange for customers’ trades.
The federal charges come a day after regulators in Massachusetts accused Robinhood of aggressively courting and manipulating inexperienced investors and then failing to protect them.