Robinhood, which develops a stock and cryptocurrency trading app of the same name, has agreed to pay $65m to settle charges from the US Securities and Exchange Commission (SEC).
According to an SEC press release dated 17 December, Robinhood failed to inform its users about how user orders were processed between 2015 and 2018.
The US Exchange Act does not prohibit broker-dealers such as Robinhood from receiving money for selling customers’ orders to high-frequency trading companies. However, the law does require broker-dealers to make sure that their clients get the best possible trades.
The Robinhood app was advertised as a platform with no transaction fees, but according to the SEC, the company was hiding these costs behind higher order execution prices.
“One of the main benefits of Robinhood was that it did not charge its customers for trading. In reality, ‘commission-free trading’ on Robinhood had a catch: Robinhood’s customers received less favourable execution prices compared to competing platforms,” the regulator said in a statement.
In its early years, Robinhood’s reliance on selling clients’ orders to trading companies – which the SEC claimed accounted for up to 80% of the company’s 2015 revenue – forced the company to ignore its duty to clients to monitor best execution.
The SEC’s investigation against Robinhood came to light back in September.
Robinhood raised $320m in investments in July at a valuation of $8.6bn, $280m at a valuation of $8.3bn in May and $200m at a valuation of $11.2bn in August.