Robinhood, the stock trading app, agreed to settle charges of misleading customers for payments with the US Securities and Exchange Commission in the latest declaration. On Thursday, the U.S. SEC charged Robinhood for claims of passing customer trades to Wall Street firms. Moreover, the firm failed in disclosing its revenue sources in totality. It’s charges include failing to satisfy the best execution practices of customer orders. This is the latest enforcement action concerning the leading platform. The charges further require Robinhood to enforce full disclosures from 2015 to 2018. The popular app derived its name from the famous Hollywood actor, thus supporting its customers with commission-free trading and intuitive app features.
The company’s decision involves settling the charges by paying $65 million as fines. Various critics have enunciated that the firm’s practices have deeply hurt its growing customers who are majorly less experienced.
Robinhood’s reality behind commission-free trades
The charges levied on Robinhood by Securities and Exchange commission are as follows,
“Repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders”
Moreover Stephanie Avakian, the director of S.E.C’s enforcement division, said in a statement,
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm”
Nonetheless, Robinhood did not admit or deny the allegations levied by the SEC. Per SEC, Robinhood concealed expensive trades for its customers with respect to its competitors. The primary cause of the issue is related to the firm’s extreme dependence on order flow payments. It aggregated up to 80% of the 2015’s revenue relating to the order flow payment method.
The SEC has failed to enforce clear regulations to encourage transparency of order flow method for trading applications to its customers. Moreover, this year 2020, was filled with lucrative opportunities for Robinhood. Moreover, the Covid-19 pandemic resulted in many people participating in the stock trading wave. Also, the firm bagged $600 million in funding in September.
Reportedly, another concern seems to hover Robinhood as Massachusetts securities regulators are keen on filing a case against the app for exposing inexperienced traders to substantial risks.
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