Robinhood takes from customers
Cryptocurrencies,  Regulation

Robinhood takes from customers, gives to itself: SEC

The crypto-friendly trading app agreed to a $65 million penalty after the SEC accused it of sending customers’ trades to brokers that paid the most

Crypto-friendly trading app Robinhood agreed to pay a $65 million fine to the Securities and Exchange Commission on Dec. 17 to settle charges that it took payments to send customers’ orders to favored brokers rather than seeking out the best terms.

Robinhood Financial, which lists 17 cryptocurrencies, offers commission free trades, making its revenue instead from payment for order flow. It also lists stocks, ETFs, options, and gold. 

Robinhood is under scrutiny from Massachusetts regulators, the Wall Street Journal reported on Dec. 16. That case involves accusations that the company encouraged underqualified traders to “take unnecessary trading risks” and “use the platform constantly” by “gamifying” the trading process.

As Modern Consensus explained in February 2019, Robinhood’s payment for order flow system allowed the company to send customers’ trades to specialist brokers for execution, choosing them based on how much they paid, rather than getting customers the best price. Payment for order flow is not illegal, but firms sill have a fiduciary obligation to get customers the best price for their trades.

The firm did not acknowledge any wrongdoing for the actions, which the SEC said took place between 2015 and late 2018. Robinhood did, however, accept a censure in the cease-and-desist order, along with the monetary penalty.

“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. “Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers.”

Commission-free trading was one of Robinhood’s main selling points to customers, the SEC said in a statement.

However, it said, “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.”

But, the agency added, “Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors.”

Even accounting for the savings from commission-free trades, the cost of Robinhood’s “inferior trade prices” to customers was $34.1 million, said the SEC.

“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, director of the SEC’s San Francisco office. “But innovation does not negate responsibility under the federal securities laws.”

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Leo Jakobson, Modern Consensus editor-in-chief, is a New York-based journalist who has traveled the world writing about incentive travel. He has also covered consumer and employee engagement, small business, the East Coast side of the Internet boom and bust, and New York City crime, nightlife, and politics. Disclosure: Jakobson has put some 401k money into Grayscale Bitcoin Trust.