SEC Dings Robinhood for Trading Charges

Robinhood, the discount broker of choice for legions of young investors, agreed in December to pay $65 million to settle Securities and Exchange Commission charges that it misled investors about revenues from accepting payments from trading firms for routing customer orders to them—a practice known as payment for order flow—and for failing to seek the best available terms to execute those orders. The SEC says trade prices that were inferior to what other brokers offered—even counting the benefit of Robinhood’s $0 commissions—cost Robinhood customers $34.1 million overall between October 2016 and June 2019. Robinhood, with an initial public offering reportedly in the works for this year, settled the charges without admitting or denying guilt.

The firm is also in the sights of securities regulators in Massachusetts, who filed a civil complaint citing Robinhood’s aggressive tactics to attract inexperienced investors, its use of game-like strategies to manipulate customers and a failure to prevent frequent outages on its trading platform. Robinhood experienced some 70 outages from the beginning of 2020 through the end of November, according to the complaint.

The complaints are a reminder to investors who pay low or no commissions to investigate more-opaque costs. The SEC requires brokers to disclose revenue from payments for order flow, for instance (see How a Stock Trade Actually Works). But Georgetown Uni­versity professor James Angel, who specializes in financial market structure and regulation, and who is also a Robinhood account holder, says the upstart brokerage should not be vilified. He notes that the firm tapped a former SEC commissioner who sat on Robinhood’s board to be chief legal officer in May. He also notes that the brokerage’s innovative business model essentially forced the entire industry to lower commissions.

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“Robinhood cut corners and got rightfully punished,” he says. “It doesn’t change the fact that it has been a positive force in the market and saved investors billions of dollars.”