RobinHood bosses began hiding their sources of income after a “best-selling author” published a book outlining his practices as hurting inexperienced investors, U.S. regulators said on Friday.
2014 by Michael Lewis Flash Boys: A Wallstreet Revolt, which was not specifically named by the Securities and Exchange Commission (SEC), would have let the bosses in the popular financial trading app sneak in to remove online information about their business model.
The SEC said the company made the moves after “a best-selling author published a book.”
Lewis’ book detailed how the stock market is influenced by high-frequency traders, including the controversial practice of selling securities to Wall Street brokers, known as “order flow payment.”
The SEC claims that Robinhood began masking the fact that “payment for order” flows accounted for 80% of its revenue from its launch in 2015 to mid-2016.
Bosses would have thought that publishing the source of public revenue could delay customers and remove a section of their online FAQs, entitled “How Does Robinhood Make Money?” Market Insider reported.
A new FAQ page falsely claimed that “pay-as-you-go” revenue was “indirect” and “negligible”, according to the SEC’s complaint.
Author Michael Lewis, photographed in an undated advertising photo, wrote Flash Boys: A Wall Street Revolt in 2014, which detailed the controversy over Robinhood’s business model and led app managers to remove sources of revenue from their website
Lewis’ book was not specifically named by the SEC, which referred to a “best-selling author who published a book” in 2014, which detailed the scandals in high-frequency trading in the United States.
The Securities and Exchange Commission on Thursday charged the popular Robinhood stock trading application for repeated misstatements that failed to reveal the company’s receipt of payments from trading companies for directing customer orders to them. They will pay a $ 65 million fine
The complaint is the latest revelation of the SEC’s enforcement action against the company.
On Thursday, Robinhood revealed that it will pay $ 65 million to address the taxes it misled customers about its sources of revenue and failed to provide the best execution of transactions, as promised. , securities regulators said on Thursday.
The Securities and Exchange Commission said in an order that the application redirected orders to commercial companies that overloaded users to execute transactions between 2015 and the end of 2018.
It resulted in $ 34.1 million in higher customer fees, the SEC said, as they found out the company made incorrect statements to customers about these practices.
Robinhood agreed to pay the civil penalty Thursday without admitting or denying the SEC’s findings.
It comes just days after Massachusetts regulators claimed the hugely popular applications and manipulated inexperienced investors.
Robinhood grew in popularity during the pandemic because it supported the lack of trading commissions in customer communications.
However, the SEC found in their statement on Thursday that these communications were not always honest, with customers losing tens of millions of dollars as a result.
“Between 2015 and the end of 2018, Robinhood made misleading statements and omissions in customer communications, including on the FAQ pages on its website, about its largest source of revenue when describing how he earned money – namely, payments from commercial firms in exchange for Robinhood sending his client orders to those firms for execution, also known as “order flow payment,” the SEC statement said.
“One of Robinhood’s points of sale to clients was that trading was’ no commission ‘, but largely due to the unusually high order flow payment, Robinhood’s client orders were executed at prices lower than other brokers’ prices.” continued.
According to CNBC, Robinhood earned $ 180 million in transactions in the second quarter.
SEC Chief of Staff Stephanie Avakian in the picture issued the order on Thursday
“Robinhood provided customers with misleading information about the real costs of choosing to trade with the firm,” said SEC chief Stephanie Avakian.
“Brokerage firms cannot mislead customers about the quality of order execution.”
However, Robinhood claimed that it has improved its customer disclosures and transaction execution processes from the period to the end of 2018, discussed in the SEC order.
“The settlement refers to historical practices that do not reflect Robinhood today,” said Dan Gallagher, Robinhood’s legal director.
“We recognize the responsibility that has helped millions of investors make their first investments and are committed to continuing to develop Robinhood as we grow to meet the needs of our customers.”
However, the company still agreed to pay the penalty without admitting or denying the findings.
It also agreed to retain a consultant to review its processes, including customer communications.
Robinhood disclosed some information about payments from a securities depository, but omitted them from its website “because it believed that payment for the order flow could be seen as controversial by customers,” it says. in the SEC order, adding that Robinhood directed customer service staff not to disclose payments to the question about Robinhood’s source of income.
The SEC’s action comes amid intense Robinhood scrutiny following the suicide of a young trader earlier this year.
Robinhood legal director Dan Gallagher said the company has changed its practices
On Wednesday, the state of Massachusetts also launched an administrative proceeding against the application, claiming that it was attracting inexperienced users and allowing them to trade risky tools, such as options, without proper education.
The complaint also accuses Robinhood of failing to maintain a properly functioning platform as the number of users exploded following multiple platform outages earlier this year that hampered transactions, even as markets were in turmoil.
Commonwealth Secretary William Galvin has filed an administrative complaint that Robinhood violated securities laws by aggressively trading Massachusetts investors “without regard to the best interests of its clients.”
“Treating this as a game and attracting young and inexperienced customers to do more and more transactions is not only unethical, but it never exceeds the standards we demand in Massachusetts,” Galvin said in a statement.
The complaint also accuses Robinhood of failing to maintain a properly functioning platform as the number of users exploded following multiple platform outages earlier this year that hampered transactions, even though markets were in turmoil.
In a statement, the company in Menlo Park, California, said it did not agree with the complaint and intended to organize a vigorous defense.
Robinhood said it “has made significant improvements to our range of options by adding guarantees and improved educational materials.”
“Millions of people have made their first investments through Robinhood and we are constantly focused on serving them,” the company said.
The complaint calls for an unspecified fine against Robinhood and an order requiring the company to hire an external consultant to review its platform, infrastructure, policies and procedures, among other sanctions.
According to CNBC, the Silicon Valley startup plans to go public in the future.
It raised more than $ 1 billion in 2020, giving it an estimated $ 11.7 billion, following an increase in consumers caused by the coronavirus pandemic and subsequent blockages.
They reported a record three million new users in the first four months of the year.
Robinhood has nearly half a million customers in Massachusetts alone, with accounts valued at over $ 1.6 billion.