The Securities and Exchange Commission of the US has fined Robinhood, the trading app, $65 million for allowing customers to be overcharged by trading firms.
Robinhood routed orders to these firms in exchange for a fixed amount of fee. These inflated transactions cost customers $34.1 million extra in fees, the SEC found in the firm’s statements to customers between 2015 and late 2018.
The trading app has become very popular during the pandemic. The app has the tremendous following as it makes trading look easy and fun-filled with game-like features hat made buying and selling stocks simple and seemingly free.
Robinhood took advantage of the lack of stringent control over customer communications on the exchange regulators’ part.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said SEC enforcement chief Stephanie Avakian.
“Brokerage firms cannot mislead customers about order execution quality.”
Robinhood said in a statement that its customer disclosures and trading execution processes had improved beyond the period cited in the SEC order.
“The settlement relates to historical practices that do not reflect Robinhood today,” said Robinhood Chief Legal Officer Dan Gallagher. “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 agreed to pay the penalty without acknowledging or denying the charges. The company also agreed to retain a consultant to review its processes, including customer communications.
Robinhood disclosed some information about the payments in a securities filing, but omitted it from its website “because it believed that payment for order flow might be viewed as controversial by customers,” the SEC order said.
Robinhood also directed customer service staff not to disclose the origins of these payments when asked about Robinhood’s source of revenue, alleges the SEC.
A young trader’s suicide brought Robbinhood’s actions to the notice of the SEC. Alex Kearns, 20, a college student in Nebraska, killed himself after he logged into the app and saw that his balance had dropped to negative $730,000.
The state of Massachusettes on Wednesday launched an administrative proceeding against the app, alleging it had lured in inexperienced users and allowed them to trade in risky instruments like options without proper education.
An analysis of new filings from nine brokerage firms by the research firm Alphacution found Robinhood’s users trade the riskiest products. During the first quarter of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the recent quarter.
Studies have shown that the more small and new traders invest in stocks, the returns keep getting smaller and trading in option is riskier and more unlucrative.