Business Costs & Regulation

SEC Dings Robinhood for Trading Charges

The complaints are a reminder to investors who pay low or no commissions to investigate more-opaque costs.

Robinhood, the discount broker of choice for legions of young investors, agreed in December to pay $65 million to settle Securities and Exchange Commission charges that it misled investors about revenues from accepting payments from trading firms for routing customer orders to them—a practice known as payment for order flow—and for failing to seek the best available terms to execute those orders. The SEC says trade prices that were inferior to what other brokers offered—even counting the benefit of Robinhood’s $0 commissions—cost Robinhood customers $34.1 million overall between October 2016 and June 2019. Robinhood, with an initial public offering reportedly in the works for this year, settled the charges without admitting or denying guilt.

The firm is also in the sights of securities regulators in Massachusetts, who filed a civil complaint citing Robinhood’s aggressive tactics to attract inexperienced investors, its use of game-like strategies to manipulate customers and a failure to prevent frequent outages on its trading platform. Robinhood experienced some 70 outages from the beginning of 2020 through the end of November, according to the complaint.

The complaints are a reminder to investors who pay low or no commissions to investigate more-opaque costs. The SEC requires brokers to disclose revenue from payments for order flow, for instance (see How a Stock Trade Actually Works). But Georgetown Uni­versity professor James Angel, who specializes in financial market structure and regulation, and who is also a Robinhood account holder, says the upstart brokerage should not be vilified. He notes that the firm tapped a former SEC commissioner who sat on Robinhood’s board to be chief legal officer in May. He also notes that the brokerage’s innovative business model essentially forced the entire industry to lower commissions.

“Robinhood cut corners and got rightfully punished,” he says. “It doesn’t change the fact that it has been a positive force in the market and saved investors billions of dollars.”

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
20 Dividend Stocks to Fund 20 Years of Retirement
dividend stocks

20 Dividend Stocks to Fund 20 Years of Retirement

Each of these high-quality dividend stocks yields roughly 4%, and you can expect them to grow their payouts even more. That's a powerful 1-2 combo for…
May 7, 2021

Recommended

Stock Market Today 7/23/20: Tech Stocks Take a Tumble
Markets

Stock Market Today 7/23/20: Tech Stocks Take a Tumble

An increase in weekly jobless benefits applications and profit-taking in tech stocks sent the major indices to steep declines Thursday.
July 24, 2020
Closing Bell 7/1/20: Nasdaq Hits New Highs to Start Q3
Markets

Closing Bell 7/1/20: Nasdaq Hits New Highs to Start Q3

The first day of 2020's second half kicked off with a mixed trading session that saw Amazon (AMZN) and Facebook (FB) help the Nasdaq to new highs.
July 2, 2020
Closing Bell 6/22/20: Big Tech Carries the Markets
stocks

Closing Bell 6/22/20: Big Tech Carries the Markets

Apple (AAPL) and Microsoft (MSFT) were at the forefront of a tech-led rally in the broader markets Monday.
June 22, 2020
Stock Market Today: Fed-Led Momentum Propels Dow Again
stocks

Stock Market Today: Fed-Led Momentum Propels Dow Again

Fed's bond backing, Powell's suggestion for more Congressional spending and hints at an infrastructure plan lifted stocks broadly Tuesday
June 16, 2020