One day after being charged by Massachusetts regulators for–among other alleged violations–encouraging inexperienced traders to make risky trades, online brokerage Robinhood has been charged by the Securities and Exchange Commission for repeatedly misleading customers about the firm’s revenue sources and failing to meet trade execution standards.
In charges announced Thursday morning, the SEC says Robinhood failed to tell customers between 2015 and 2018 that its largest revenue source was derived from the trading firms to which it routed customer orders, a practice that ultimately resulted in trades that generated less money for customers than they would’ve gotten at other brokers.
Robinhood also falsely claimed on its website between October 2018 and June 2019 that “its execution quality matched or beat that of its competitors,” the SEC said.
The SEC order concluded that Robinhood’s inferior trading prices ultimately deprived investors on its platform of $34.1 million–even after taking into account the savings from Robinhood’s commission-free trading.
The Menlo Park, Calif.-based firm did not admit or deny the SEC’s findings but agreed to pay $65 million to settle the charges, according to the Thursday order.
In an emailed statement to Forbes, a Robinhood spokesperson said the firm has “significantly improved” its best execution processes and has established relationships with additional market-makers to improve execution quality, adding: “We are fully transparent in our communications with customers about our current revenue streams.”
“There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money,” said Erin E. Schneider, a director at the SEC’s San Francisco regional office. “But innovation does not negate responsibility under the federal securities laws.”
The Massachusetts Secretary of State’s office filed a complaint Wednesday alleging Robinhood violated the state’s new fiduciary law requiring investment brokers to prioritize its clients’ best interests. A Robinhood spokesperson said the firm disagreed with the allegations and will defend itself against them: “Robinhood is a self-directed broker-dealer and we do not make investment recommendations,” the company said.
Robinhood Failed To Protect Customers From Risky Trades, State Regulator Says (Forbes)
The Inside Story Of Robinhood’s Billionaire Founders, Option Kid Cowboys And The Wall Street Sharks That Feed On Them (Forbes)
20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance (Forbes)