Robinhood has been forced to pay $65 million to settle charges from US securities regulators that it failed to provide its customers with the best prices for trades on its platform.
The Securities and Exchange Commission said that while Robinhood had promoted its services as “commission free”, its customers’ orders were processed at prices “inferior” to other brokers.
The commission also said the company failed to disclose payments it received from high-speed trading houses that process its orders, payments that may have influenced decisions over how Robinhood trades are executed.
The commission found that Robinhood had deprived customers of $34.1 million because of those payments, which led to the inferior pricing practices, even when taking into account the fact its customers were not paying a commission to trade.
An analysis by the SEC found that Robinhood users would have got significantly better prices by placing orders with other brokers. For orders of more than 100 shares, the difference was worth more than the $5 trading commission the other broker would have charged.
For orders of more than 500 shares, customers would have been $15 better off on average, the SEC found. The regulator alleged that Robinhood “wilfully” violated the Securities Act by making statements that were misleading to customers about how it made money.
Robinhood makes money by selling trades to market makers, a practice called payment for order flow. The trading app repeatedly failed to disclose that it receives such payments from trading firms for routing its customers’ orders, the SEC said.
The regulator said that Robinhood had made these “false and misleading statements” during a period of rapid growth. Robinhood did not admit or deny the SEC findings. Robinhood said in a statement that the practices under scrutiny in the settlement “do not reflect Robinhood today”.
The company said it was working with additional market makers to improve its trading executions. It added: “We recognise the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.”