Robinhood to pay $65 million to settle SEC claims

Robinhood agreed, in a pre-litigation settlement, to resolve the dispute with the Securities and Exchange Commission (SEC), paying $65 million. The regulator accused the crypto-friendly platform of misleading users by asserting that it did not charge trading commissions.

SEC charges Robinhood Financial with misleading customers about revenue sources and failing to satisfy duty of best execution https://t.co/EDRK5cTxvB

— SEC_News (@SEC_News) December 17, 2020

The SEC said that Robinhood clients executed trades at prices that included fees the platform later received from market makers. The regulator contends that Robinhood misinformed users about the sources of its revenue from 2015 to 2018.

The Securities Exchange Act does not prohibit broker-dealers from earning revenue from directing market orders through so-called electronic market makers, but requires them to execute trades in the best interests of the client.

“The ‘no-commission’ trading at Robinhood was merely a gimmick: customers received worse execution prices than they could expect from the platform’s rivals,” the regulator said.

The SEC estimated that Robinhood accounted for as much as 80% of its revenue in 2015.

In an interview with ForkLog, Opium Protocol founder Andrey Belyakov said that US law requires seeking the best available execution for client orders, but seeking the best price is not mandatory.

According to a Bloomberg investigation, Robinhood exploited this nuance and sold payment-flow data to high-frequency trading (HFT) firms, earning tens of times more for that information than is typical.

“HFT firms were executing orders at prices not the best, and used the data to earn above the norm. These firms effectively shared excess profits with Robinhood, while the startup proclaimed no commissions. For a time the argument for best execution held, but we see that the regulator has followed the ‘substance over form’ principle. It is amusing that the founders’ idea was to oppose established practices in the financial markets,” emphasised Belyakov.

The Commission’s allegations again spotlighted Robinhood’s controversial reputation. Earlier reports indicated that the Massachusetts regulator to file a lawsuit against the platform.

Prior to that, Robinhood’s activity drew the attention of the SEC and the Financial Industry Regulatory Authority (FINRA) due to outages in the app in March.

Robinhood’s capitalisation reached $11.7 billion after the successful close of the Series G funding round.

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