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Robinhood Reaches $65M Settlement with SEC Over ‘Commission-Free Trading’

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The Securities and Exchange Commission announced on December 17th, that it has settled charges laid against popular trading app, Robinhood.

$65 million Settlement

The aforementioned settlement is stated to be for $65 million USD.  As is commonplace with these type of settlements, it means that Robinhood will not need to admit any wrong-doing – it will however see restrictions placed upon it moving forward.

“…Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty.  Robinhood also agreed to retain an independent consultant to review its policies and procedures relating to customer communications, payment for order flow, and best execution of customer orders, and to ensure that Robinhood is effectively following those policies and procedures.”

Commission Free-ish?

$65 Million is nothing to scoff at – it is a large fine for a company of any size.  The size of this fine is primarily due to two reasons – the popularity of the exchange (high number of transactions), and the duration of the infractions (2015-2018).

When first making big strides in popularity, Robinhood made a name for itself by touting its platforms ‘commission-free trading’.  Unfortunately, this claim was a little too good to be true, and the SEC has called out Robinhood on it.  The SEC found that Robinhood misled its customer base by hiding its true revenue streams with the intent of making investors believe they were getting a better deal than they really were.

“…due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices.”

 The SEC continues,

“Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors…Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.”

Unicorn

At the end of the day, while $65million is a sizable amount, Robinhood is no longer a small start-up.  The company notably became one of FinTech’s first to attain ‘Unicorn’ status – indicated when privately held company which has attained a valuation greater than $1 billion.

It has managed to do this by introducing a new generation investing, opening opportunities which were previously inaccessible.  This has occurred much to the chagrin of traditional investors, as many believe that markets should only be accessible to ‘educated’ individuals.

Interest in such FinTech platforms continues to grow, as made evident by other platforms joining Robinhood as industry ‘Unicorns’.  We recently took a look at WealthSimple, as it appeals to much of the same investor base.  While its approach to investing varies, the idea of catering to younger investors with accessible investing through technology remains the same.

Robinhood

Founded in 2013, Robinhood is a FinTech company which is headquartered in California.  Robinhood provides its clientele with access to a variety of investment mediums such as ETFs, cryptocurrencies, and more.

CEO, Baiju Bhatt, currently oversees company operations.

Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology.