Robinhood Financial, the investment app central to the recent “GameStonk” or Reddit’s WallStreetBets effort to take on Wall Street hedge funds, was fined $65 million in December by the Securities and Exchange Commission for misleading its customers about how the company makes its revenue from their trades.
On Dec. 17, the SEC issued a fine a day after regulators in Massachusetts filed a lawsuit against the company for targeting young, inexperienced investors with its app, advertising stock investing as if it were a video game.
Federal regulators said that between 2015 and 2018 Robinhood only partially explained on its FAQ (Frequently Asked Questions) page how it makes money, and did not include details about its largest source of revenue, which are the users’ own trades. Robinhood takes a user’s stock and sells it to a larger trading firm, which then executes the trade. The SEC refers to this process as a “payment for order flow.”
The authorities state that the company made no mention of payment for order flow rates at a time when the company was rapidly growing, and simply advertises its services as “commission free,” which the SEC claims is deceptive to customers who received inferior trade prices that “in aggregate deprived customers of $34.1 million” despite savings they may have received from paying no commissions.
"Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm," SEC Enforcement Division director Stephanie Avakian said.
In response, a Robinhood spokesperson said that the company is now "fully transparent in our communications with customers about our current revenue streams," and that the fine stems from “historical practices that do not reflect Robinhood today.”
Clearly, not much has changed between then and now.
Robinhood’s decision earlier in this week to cut access to stock buys for GameStop, AMC, and a number of other stocks picked out by Reddit’s WallStreetBets community, while forcing users to sell their existing stock, has led to widespread calls for a new SEC investigation into the company. Users affected by the app’s seemingly arbitrary and unexplained decision to limit its stock trades has also prompted investors to join a class-action lawsuit against the company.
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