Today, American securities watchdog the SEC announced that Robinhood, a free-to-trade broker that has grown rapidly in recent years, has paid a $65 million fine to settle charges relating to some of its historical business practices. The actions at issue occurred between 2015 and 2018, with the SEC alleging that the company “made misleading statements and omissions in customer communications” about how it generated “its largest revenue source” — specifically, payment for order flow.
The SEC also said that the well-funded unicorn “falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors,” when it reality it was executing customer trades at “inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.”
Robinhood raises $200M more at $11.2B valuation as its revenue scales
Robinhood did not admit or deny the SEC charges, per the government body.
Reached for comment, Robinhood’s Chief Legal Officer Dan Gallagher said via email that the $65 million settlement “relates to historical practices that do not reflect Robinhood today.” The company, in a somewhat rare on-the-record statement added that it has “significantly improved [its] best execution processes, and have established relationships with additional market makers to improve execution quality.”
Robinhood listed five execution venues in its most recent payment for order flow filings.
TechCrunch has covered Robinhood’s payment for order flow incomes in recent quarters, as the company has scaled both its userbase and trading volumes, generating growing revenue from how its customer orders are executed.
In Q2 2020, for example, Robinhood’s revenues from payment for order flow sources doubled to around $180 million from a Q1 2020 result of around $90 million. Of course, those numbers come several years after the quarters noted in the settlement announcement.
Update: It’s worth noting that the SEC news comes less than a day after the Massachusetts Securities Division filed a complaint against Robinhood, alleging that it “engaged in acts and practices in violation of the Act and Regulations by aggressively marketing itself to Mass investors without regard for the best interests of its customers and failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base.”
The state is seeking censure of Robinhood, improvement to its governance, along with monetary restitution and other financial penalties. The Massachusetts complaint can be read here.
Update II: Robinhood reached out with a comment on the Massachusetts situation, saying that it “disagree[s] with the allegations in the complaint by the Massachusetts Securities Division and intend[s] to defend [itself] vigorously.” The unicorn added that it doesn’t offer investment advice, “has worked diligently to ensure [its] systems scale,” and that it has improved its options service in recent months.
Impacts
Robinhood has had an explosive, if occasionally rocky year. The company has had bouts of downtime during key market moments, had to reform its options-trading service after the suicide of a user, and has seen growth from its incomes from order flow slow.
But despite those matters, the company’s 2020 trajectory has been little short of impressive. Its rapid revenue helped the company raise hundreds of millions of dollars this year at expanding valuations, and made Robinhood a 2021 IPO candidate.
It’s hard to imagine that today’s news will fully derail Robinhood’s growth; if the charges had dealt with a historical period more close to the current day, perhaps the impact would be larger. Robinhood’s competitors — Public.com raised $65 million the other day — could capitalize on the news.
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