On Thursday, the Securities and Exchange Commission charged Robinhood, the commission-free stock trading app, with deceiving customers on the way its app makes money as well as compromised delivery of services.
The SEC’s charges come after Massachusetts regulators lodged a complaint against Robinhood. The app has been accused of predatory marketing on inexperienced investors.
Reports say that Robinhood agreed to pay a civil penalty of $65 million but has not admitted to nor denied SEC’s findings. The discount brokerage Silicon Valley firm set it eyes on going public eventually and in 2020 raised over $1 billion in funding. Its current valuation is $11.7 billion.
“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 trading app is a favorite among millennials for pioneering the “commission free trading.”
While charging for order flow from Wall Street firms is a controversial, but most electronic brokers make use of this legal practice. Robinhood sticks out as a sore thumb as it is the company’s biggest revenue-making source.
“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.”
″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.