The bloom is off the rose for Robinhood’s self-styled image as a champion of the little guy. The stock brokerage has agreed to pay a $US65 ($85) million penalty to settle U.S. Securities and Exchange Commission charges that it misled customers with its claims of being a commission-free method of trading stocks. The state of Massachusetts has also filed a related complaint against Robinhood that is still working its way through the system.
Since the pandemic sent many people indoors with nothing to do but worry about the future, Robinhood has controversially added millions of users to its stock trading app and set off alarms that inexperienced investors are causing irregular market swings while taking on financial risks that can have devastating results. But the company has been around for years, and on Wednesday, the SEC announced charges relating to some old crimes. The agency said Robinhood engaged in an effort to mislead users about the revenue the company collects from transactions.
According to the SEC order, between 2015 and 2018, Robinhood advertised itself to the public as a way to trade stocks without paying a commission to brokers. In its FAQ section on its website and in communications with customers, the SEC said, the company failed to disclose its primary revenue stream came from its partnerships with principal trading firms that execute trades for Robinhood.
The way these types of partnerships typically work, the trading firms offer bids for executing the trade, and “broker-dealers obtain price improvement on the vast majority of customer orders that they send,” the SEC said. That is to say that, typically, brokerages like Robinhood find the best price for their customers that a trading firm is offering and execute the trade with that bidder. But the order claims that Robinhood failed to live up to its “duty of best execution” obligation — meaning that it would take more costly incoming bids to jack up its own revenue while publicly claiming that “execution quality and speed matches or beats what’s found at other major brokerages.”
The SEC said that Robinhood conducted its own internal analyses of its execution quality in 2019 and found that “the amount of price improvement obtained for Robinhood customers was far lower than at competing broker-dealers, measured on a per order, per share, and per dollar traded basis.” In other words, going to one of Robinhood’s competitors would likely have gotten individual investors a better deal. In total, the SEC found that the company cost traders $US34.1 ($45) million by not following standard practices for the industry, a figure that includes the cost-savings that come as a result of not paying a typical commission.
Robinhood did not immediately respond to Gizmodo’s request for comment, but as per the terms of its settlement with the SEC, it admits no wrongdoing and has agreed to pay a $US34.1 ($45) million penalty. It has also agreed to cease-and-desist from engaging in any errant practices outlined in the order. The company told the Wall Street Journal that the issues discussed in the order “do not reflect Robinhood today.”
While that case may be settled, Massachusetts securities regulators filed a separate complaint against Robinhood on Tuesday claiming that the brokerage uses the promise of free stocks, incessant push notifications, addictive arbitrary tasks, and visual rewards to “gamify” the experience of trading and encourage users to irresponsibly make frequent trades without offering proper oversight of its platform.
“They’ve exploited the current situation with the pandemic,” Massachusetts Secretary of the Commonwealth William Galvin told Bloomberg. “They contributed to the frothiness of the market, bringing people in who don’t know much about it. They’re not responsible fiduciaries.”
Among the allegations that Galvin’s office believes violate Massachusett’s state law, Robinhood is accused of approving unqualified investors to participate in options trading. The complaint wants Robinhood to bring in outside consultants to review its practices and technical infrastructure, and it asks for an administrative fine to be levied against the company. Robinhood told the Boston Globe that it intends to fight the lawsuit.
Once again, Robinhood has admitted no wrongdoing when it comes to any of these allegations, but it’s all a nice reminder that anyone who tells you they can solve a complicated problem just because they built an app is probably full of shit.