SEC charges Robinhood with misleading customers about how it makes money

December 17, 2020

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 of trades.

Robinhood agreed to pay a $65 million civil penalty, without admitting or denying SEC’s findings.

“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, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as ‘payment for order flow,’” the SEC statement read.

“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 went on to say.

The millennial favored trading app is best know for pioneering the “commission free trading.” Robinhood, and 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, however Robinhood sticks out because it is the company’s biggest revenue source. It allowed Robinhood to offer commission-free trading through its app, causing the rest of the industry to eventually follow suit with free trading.

“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.”

“The settlement relates to historical practices that do not reflect Robinhood today. We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs,” Dan Gallagher, Chief Legal Officer at Robinhood told CNBC.

″We are fully transparent in our communications with customers about our current revenue streams, have significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality,” a Robinhood spokesperson told CNBC.