SEC Charges Stock Trading Platform Robinhood with Misleading Customers

The SEC has charged popular stock trading app Robinhood with deceiving customers about how the company makes money and failing to deliver the best execution of trades.

CNBC reports that the SEC has charged Robinhood with deceiving customers about how the stock trading app makes money and failing to deliver the best execution of trades. The company has agreed to pay a $65 million civil penalty without admitting or denying the SEC’s findings. A lawyer from Robinhood said that the practices “do not reflect Robinhood today.”

Robinhood, which has plans to go public, has raised over $1 billion in funding in 2020 lifting the company’s valuation to $11.7 billion. The SEC stated: “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 statement added: “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 SEC order found that Robinhood provided inferior trade prices costing customers $34.1 million. Stephanie Avakian, director of the SEC’s Enforcement Division, commented: “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm. Brokerage firms cannot mislead customers about order execution quality.”