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# Trading app Robinhood settles SEC charges for $65 million

# Trading app Robinhood settles SEC charges for $65 million

Robinhood has staved off a suit from the Securities and Exchange Commission by agreeing to pay $65 million. 

The trading app, which takes its name from the English folk hero who stole from the rich to give to the poor, made its name by making investing simpler for newcomers. Per a Thursday announcement from the SEC, Robinhood deceived its users as to where its money was actually coming from between 2015 and 2018, citing:

“Material misrepresentations and omissions by Robinhood relating to its revenue sources, specifically its receipt of payments from certain principal trading firms, also known as electronic market makers, for routing Robinhood customer orders to them, and relating to certain statements about the execution quality Robinhood achieved for its customers’ orders.”

The SEC’s underlying Exchange Act does not prohibit broker-dealers like Robinhood from getting paid for directing orders through those principal trading firms, but they do require that those broker-dealers work to get their customers the best deal.

Indeed, the SEC says that Robinhood concealed the worse deal that customers were getting. The firm’s initial pitch as a commission-free platform allowed the firm to hide similar costs in the form of higher execution prices on user orders: 

“One of Robinhood’s primary selling points was that it did not charge its customers trading commissions. In reality, however, ‘commission free’ trading at Robinhood came with a catch: Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors.”

In its early years, Robinhood’s overwhelming dependence on order flow payments — which the SEC alleges was up to 80% of the firm’s 2015 revenue — seem to have led the firm to overlook this duty to customers. 

Fortunately for Robinhood, 2020 has been extremely lucrative for such fintech platforms. With more people stuck at home and the stock market soaring above other means of making money, retail trading on consumer-friendly apps has picked up. The firm just saw a $660 million funding round in September. 

At the same time, today’s settlement does not appear to be the end of Robinhood’s legal troubles. Just yesterday, reports emerged that Massachusetts securities regulators were looking to file a case against Robinhood for subjecting inexperienced investors to “unnecessary trading risks.” 

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