Silicon Valley start-up, Robinhood fined $65M for misleading customers about how it makes money

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The U.S Securities and Exchange Commission on Thursday charged Robinhood Financial with deceiving its inventory market customers about how it makes money.

The cost got here barely a day after regulators in Massachusetts sued the corporate, accusing Robinhood of focusing on younger and inexperienced traders with flashy gimmicks on its buying and selling app that deal with inventory investing like a sport.

“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 mentioned.

SEC additionally charged the corporate for misleading customers that buying and selling on its platform is fee free.

“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,” in accordance with an announcement by SEC.

Without contest, Robinhood agreed to pay the $65 million nice. Dan Gallagher, the corporate’s chief authorized officer mentioned “The settlement pertains to historic practices that don’t replicate Robinhood at the moment.

“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,” Gallagher mentioned.

Robinhood makes hundreds of thousands by way of a course of often known as “fee for order move”, whereby it takes a buyer’s inventory order and sells it to a a lot greater buying and selling agency that executes the commerce.

Most on-line brokers depend on this controversial, however authorized observe as their major technique to make earnings in lieu of commissions.

Robinhood obtained $180 million in funds for trades by way of the “fee for order move” observe within the second quarter of 2020, in accordance with CNBC, citing SEC submitting.

SEC mentioned Robinhood didn’t point out fee for order move charges at a time when the corporate was quickly rising, however it markets its companies as “commission free,”

The Federal Regulator accused Robinhood of offering inferior commerce costs that price customers $34.1 million, even after contemplating the financial savings from not paying a fee.

“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” mentioned Stephanie Avakian, director of the SEC’s Enforcement Division.  “Brokerage firms cannot mislead customers about order execution quality.”

“Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers,” mentioned Joseph Sansone, chief of SEC Enforcement Division’s Market Abuse Unit.

In protection, a Robinhood spokesperson mentioned; “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.”

Robinhood, the Silicon Valley start-up has achieved great progress this yr resulting from market volatility attributable to the coronavirus pandemic. The firm gained three million new customers within the first 4 months of 2020, in accordance with experiences