Robinhood, the free trading app where the investors trade stocks, options and crypto currency sans a commission was accused of non-revealing the money they received from the market makers. This case was a black mark on the reputation of Robinhood and this was not the only controversy that they have gone through during their ages in the industry. Now the case has seen its end and The Securities and Exchange Commission found Rohinhood guilty of misleading their customers. The stock trading app will have to pay $65 million civil penalty as the punishment for not meeting what was expected out of them and misleading their clients about how they get the revenue from.
Rohinhood established themselves as a place where the new and casual investors could get a general idea about what stock trading is and how it is properly done. The commission fee service made them stand out from the brokers. According to SEC, Robinhood has been involved in “payment for order flow,” where the retail brokers give the opportunity for the Wall Street firms to trade against their customers. In return, the retail brokers get paid. The method is not illegal, but highly controversial.
SEC alleged that this is the main source of income for Robinhood and they kept it hidden for their clients. They went on to say that, Robinhood was sending the customer orders to the firm which paid the highest amount, instead of thinking about the customer’s benefit and going for more cost-effective options. Because of this arguably unethical practice, the customers have lost more than 34 million USD during the time period when Robinhood was under the scrutiny of SEC.
According to an article published in the New York Times back in July, Robinhood has earned a huge chunk of money by selling their customer orders to the Wall Street Firms and that amount is extremely high when compared with the earnings of other brokerage firms.
William F. Galvin, who is the Massachusetts securities regulator, has accused Robinhood of compelling people to trade more and more making it feel like much more of a game than a serious business. He has pointed out app’s features like “raining of confetti when an order is placed” and “offering the clients free shares of stock when they scratch digitally” to support his fact.