Robinhood has agreed to pay a $65 million civil penalty to settle allegations by the Securities and Exchange Commission that it repeatedly failed to disclose its receipt of payments from trading firms for routing client orders to them, and also failing to satisfy its duty to seek the best reasonably available terms to execute customer orders, the SEC said Thursday.
The settlement was announced the day after Massachusetts’ top securities regulator, William F. Galvin, accused Robinhood of violating state law by using overly “aggressive tactics to attract new, often inexperienced, investors” and “gamification to encourage and entice continuous and repetitive use” of its mobile application. Robinhood denied those allegations.
In an order filed by the SEC on Thursday, the regulator said that, 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 settlement relates to historical practices that do not reflect Robinhood today,” said Dan Gallagher, chief legal officer at Robinhood and a former SEC commissioner. “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.”
Robinhood is “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 ThinkAdvisor.
“One of Robinhood’s primary selling points was that it did not charge its customers trading commissions,” the SEC said in its order. “In reality, however, ‘commission free’ trading at Robinhood came with a catch: Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors,” the regulator added.
“For larger value orders, this price difference at Robinhood exceeded the commission its competitors would have charged,” the SEC alleged, adding: “These inferior prices were caused in large part by the unusually high amounts Robinhood charged the principal trading firms for the opportunity to obtain Robinhood’s customer order flow.”