RobinHood bosses began hiding their sources of income after a ‘best-selling author’ published a book in which their practices allegedly harm inexperienced investors, US regulators said Friday.
Michael Lewis’ 2014 Flash Boys: A Wallstreet Revolt, not specifically mentioned by the Securities and Exchange Commission (SEC), reportedly left bosses at the popular financial trading app that delved into removing information about their business model online.
The SEC said the company took the steps after “a best-selling author published a book.”
Lewis’ book describes how the stock market is affected by high-frequency traders, including the controversial practice of selling securities to Wall Street brokers, known as “ payment for order flow. ”
The SEC alleges that Robinhood began masking the fact that ‘payment for order’ flows made up 80% percent of its revenue since its launch in 2015 through mid-2016.
Bosses reportedly believed that disclosing the source of income could scare off customers and removed a section from their online FAQ entitled, “ How Does Robinhood Make Money? ” Reported Market Insider.
A new FAQ page falsely claimed that the ‘pay-on-order’ income was ‘indirect’ and ‘negligible,’ according to the SEC complaint.
Author Michael Lewis, depicted in an undated publicity photo, wrote Flash Boys: A Wall Street Revolt in 2014, setting out controversies over Robinhood’s business model and leading app bosses to remove sources of income from their website
Lewis’ book was not specifically named by the SEC, which referred to a “ bestselling author who published a book ” in 2014 describing scandals in high-frequency trading in the US
The Securities and Exchange Commission charged popular stock trading app Robinhood on Thursday for repeated inaccuracies that failed to disclose receipt of payments from trading firms for routing client orders to them. They will pay a fine of $ 65 million
The complaint is the latest disclosure in the SEC’s enforcement action against the company.
On Thursday, Robinhood announced they would pay $ 65 million to cover the fees it mislead customers about its sources of income and not deliver the best execution of transactions as promised, US securities regulators said Thursday.
The Securities and Exchange Commission said in an injunction that the app was sending orders to trading firms that overcharged users to execute trades between 2015 and the end of 2018.
It resulted in $ 34.1 million in higher client fees, the SEC said, as they found the company has made false statements to customers about these practices.
Robinhood agreed to pay the civil fine on Thursday without admitting or denying the SEC’s findings.
It comes just a day after Massachusetts regulators claimed the wildly popular app targets and manipulated inexperienced investors.
Robinhood has skyrocketed in popularity during the pandemic as it touted the lack of trade commissions in customer communications.
Still, the SEC found in their statement Thursday that these communications had not always been fair, with the result that customers are missing out on tens of millions of dollars.
Between 2015 and the end of 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its main source of income in describing how it made money – namely, payments from trading firms in exchange for sending Robinhood to its customer orders to those firms for execution, otherwise known as “payment for order flow,” the SEC statement read.
“One of Robinhood’s selling points to clients was that the trade was’ commission free, ‘but largely due to the unusually high payment for order flows, Robinhood clients’ orders were executed at prices lower than other broker prices.” it went on.
According to CNBC, Robinhood made $ 180 million in transactions in the second quarter.
SEC enforcement chief Stephanie Avakian, pictured, issued the warrant Thursday
“Robinhood has provided customers with misleading information about the true cost of dealing with the company,” said Stephanie Avakian, chief of the SEC.
‘Brokerage firms should not mislead customers about the quality of order execution.’
However, Robinhood argued that it has improved customer disclosure and trade execution processes since the period to the end of 2018 discussed in the SEC order.
“The settlement involves historical practices that do not reflect current Robinhood,” said Robinhood Chief Legal Officer Dan Gallagher.
“We recognize the responsibility that comes with helping millions of investors make their initial investments, and we are committed to continuing to develop Robinhood as we grow to meet the needs of our customers.”
Still, the company agreed to pay the fine without admitting or denying the findings.
It also agreed to hire a consultant to review its processes, including communication with clients.
Robinhood disclosed some information about the payments in a securities filing, but omitted it from its website “ because it believed that payment for the order flow could be considered controversial by clients, ” the SEC injunction said, adding that Robinhood’s staff of customer service not to disclose payments when asked about Robinhood’s source of income.
The SEC action comes amid closer scrutiny of Robinhood following the suicide of a young trader earlier this year.
Robinhood Chief Legal Officer Dan Gallagher claimed the company has changed its practices
On Wednesday, the state of Massachusetts also opened an administrative suit against the app, claiming it lured inexperienced users and allowed them to trade risky instruments such as options without proper training.
The complaint also accuses Robinhood of failing to maintain a functioning platform as the number of users has exploded, following multiple platform outages earlier this year that prevented transactions even as markets were in turmoil .
Commonwealth Secretary William Galvin filed an administrative complaint alleging that Robinhood violated securities laws by aggressively promoting itself to Massachusetts investors “without regard to the interests of its clients.”
“Treating this like a game and enticing young and inexperienced customers to make more and more transactions is not only unethical, but also falls far short of the standards we require in Massachusetts,” Galvin said in a statement.
The complaint also accuses Robinhood of failing to maintain a properly functioning platform when user numbers exploded after multiple platform failures earlier this year that prevented transactions even as markets were in turmoil.
In a statement, the Menlo Park, California-based company said it disagrees with the complaint and plans to defend it vigorously.
Robinhood said it has “made significant improvements to our range of options, adding precautions and improved educational materials.”
“Millions of people have made their initial investments through Robinhood and we continue to focus on serving them,” the company said.
The complaint seeks an unspecified fine against Robinhood and an injunction requiring the company to hire an outside consultant to review its platform, infrastructure, policies and procedures, among other sanctions.
According to CNBC, the Silicon Valley startup has plans to go public in the future.
It raised more than $ 1 billion in 2020, putting it at a valuation of $ 11.7 billion, following an increase in user numbers due to the coronavirus pandemic and subsequent lockdowns.
They reported a record three million new users in the first four months of the year.
Robinhood has nearly half a million customers worth more than $ 1.6 billion in Massachusetts alone.