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Summary
- Robinhood is set to pay US$65 million in regard to SEC’s allegations that the company provided misleading information about its source of revenue.
- The Securities and Exchange Commission had filed the lawsuit just before Robinhood planned to go public.
Robinhood, a financial service company, will pay US$65 million (A$85 million) to settle the government lawsuit in regard to not disclosing full information of its dealings with high-speed traders, and also not providing the best deal prices to its customers via the company app.
The Securities and Exchange Commission (SEC) revealed the formal settlement ahead of Robinhood’s plans of going public (with an IPO).
Robinhood makes money by using high-speed traders and other investors to find the best stock online price for Robinhood customers. The high-speed traders and investors, in turn, pay to Robinhood for right to conduct several trades in hope of generating the revenue..
The trading company, however, neither accepted, nor denied SEC’s charges, even after opting for a settlement. .
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Image Source: Shutterstock
What is Robinhood accused of?
The SEC found that Robinhood provided misleading information in its FAQs on the official website between 2015 and 2018. It also failed to disclose what was the primary source of its revenue, and the way it made money, according to the SEC statement.
Watchdogs also found that Robinhood did not provide the best deals of trading stocks to its customers. Instead, the platform deprived its users of US$34.1 million, even when no commission was taken into consideration.
According to the SEC, Robinhood wasn’t transparent enough about real costs of choosing a trade on its trading app.
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In the recent statement, Robinhood dismissed the allegations, saying the platform always maintained complete transparency about its revenue.
How did Robinhood become famous?
Robinhood gained vast recognition after introducing a no-commission system, where customers do not need to pay for its online broker services.
That said, Robinhood became one of the most known online trading platforms in the US, as trading stocks got more accessible to shareholders, who might may not have a lot of experience.
What did regulators have to say?
The SEC claims that the famous Robinhood model came with a price, as the platform did not offer the best stock prices available in the market.
The organisation found that the difference in price with a competitor online broker would make up for the loss of money Robinhood users had experienced. Robinhood remained firm, stating it delivers the most profitable deal on the market.
Apart from paying a whopping amount for the settlement, Robinhood has also agreed to hire a third-party consultant, who would review policies regarding the customer service, among others.
Even though Robinhood is considered to be a highly profitable platform, it has faced scrutiny due to its unconventional trading.
A few days ago, Robinhood faced criticism from watchdogs in Massachusetts, as the company was accused of not keeping the best interests of its customers in mind, and failed to provide a proper platform to trade as the number of its users exploded.
Robinhood paid US$1.25 million last year after the Financial Industry Regulatory Authority accused the trading platform of not providing the best stock trading prices to its customers.
