Robinhood is facing legal action from regulators in the United States, following accusations it has been marketing aggressively to inexperienced traders.
On Thursday, the U.S. Securities and Exchange Commission (SEC) charged Robinhood Financial LLC with “repeated misstatements” that allegedly “failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them” and also failed “to satisfy its duty to seek the best reasonable available terms to execute customer orders.”
According to the securities regulator, Robinhood touted its trading services as “commission free,” but it did so by executing the customers’ orders at prices “inferior to other brokers’ prices.” The platform also claimed on its website that “its execution quality matched or beat that of its competitors.”
“The order finds that Robinhood provided 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 made these false and misleading statements during the time in which it was growing rapidly,” the SEC said.
Robinhood has agreed to pay $65 million to settle the charges, the regulator said.
Meanwhile, the trading app is also the subject of a draft complaint drawn up by the Massachusetts Securities Division running to 20 pages, in which the regulator details a number of alleged violations of state law and regulation.
According to the detail of the complaint, Robinhood has pushed inexperienced investors into taking “unnecessary trading risks” through its aggressive marketing and promotional efforts.
Robinhood has benefited from strong growth in its user base through the coronavirus pandemic, with a large number of younger, inexperienced investors signing up and trading for the first time.
The complaint accuses Robinhood of “prioritizing its revenue over the best interest of its customers,” in attracting more investors to use its platform. Accused of “gamifying” trading, the firm is accused of encouraging “continuous and repeated engagement with its application,” posing additional risks for inexperienced investors.
The state regulator is looking to compel Robinhood to take more steps towards protecting their customers, including introducing approval for options trading, as well as paying an administrative penalty.
The app is also admonished for outages, with the regulator saying Robinhood should seek external help to resolve potentially costly technical problems.
The trading platform will most likely now be expected to defend the accusations in the report, and will be answerable to the regulator via the courts for its trade in Massachusetts.
Responding to the complaint, a spokesperson for Robinhood was quoted by the Wall Street Journal as saying the firm continues to operate in full compliance with applicable laws. “Robinhood has opened up financial markets for a new generation of people who were previously excluded. We are committed to operating with integrity, transparency, and in compliance with all applicable laws and regulations.”
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