Robinhood paid $65 million after the SEC accused it of misleading customers about its main revenue source
The company said these old practices don’t reflect how it operates today
Robinhood Financial has agreed to pay $65 million after the Securities and Exchange Commission (SEC) charged the online brokerage for failing to disclose to customers that it received payments from trading firms for routing customer orders to them.
The SEC alleged that Robinhood made misleading statements and omissions to customers between 2015 and 2018 regarding its largest revenue source when describing how it made money. The SEC said Robinhood at the time failed to inform customers about payments it received from trading firms to route customer orders through them. This caused customers to pay higher prices to execute trades, even though Robinhood claimed its execution quality matched or beat that of its competitors, the SEC said.
Following a monthslong probe, the SEC said it found that Robinhood deprived customers of $34.1 million even after taking into account the customer savings from not paying commissions to Robinhood.
Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40% of its overall revenue.
“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.”
Robinhood agreed to a cease-and-desist order that prohibits it from violating antifraud provisions as well as requires it to pay a $65 million fine. Robinhood also agreed to retain a consultant to review its policies and procedures related to customer communications, payment for order flow, and best execution of customer orders.
“The settlement relates to historical practices that do not reflect Robinhood today,” said Dan Gallagher, Robinhood’s chief legal officer. “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.”
Other sources of revenue for Robinhood include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and investing tools, interest on uninvested cash, lending stocks purchased on margin, and fees on purchases using the company's debit card.
The number of investors using Robinhood has grown significantly since COVID-19 hit the U.S. in March, prompting retail investors to fuel a buying boom in the markets this year.