US regulators say Robinhood concealed sources of income

The Securities and Exchange Commission said the company made the moves after ‘a best-selling author published a book’

Bosses at RobinHood started concealing their sources of income after a ‘best-selling author’ published a book exposing their practises as allegedly hurting inexperienced investors, US regulators said Friday.

Michael Lewis’ 2014 Flash Boys: A Wallstreet Revolt, which wasn’t specifically named by the Securities and Exchange Commission (SEC), allegedly left bosses at the popular financial trading app scrambling to remove information online on their business model.

The SEC said the company made the moves after ‘a best-selling author published a book’.

Lewis’ book detailed how the stock market is influenced by high-frequency traders, including the controversial practise of selling securities to Wall Street brokers, known as ‘payment for order flow’.

The SEC claims that Robinhood started masking the fact ‘payment for order’ flows made up 80% percent of its revenue since its launch in 2015 until mid 2016.

Bosses allegedly believed that making the revenue source public could put off customers and removed a section from their FAQs online titled ‘How does Robinhood make money?’, Market Insider reported.

A new FAQ page falsely claimed ‘payment to order’ income was ‘indirect’ and ‘negligible’, the SEC complaint read.

The complaint is the latest revelation in the SEC’s enforcement action against the company.

On Thursday Robinhood revealed that they would pay $65 million to settle charges it misled customers over its revenue sources and failed to deliver the best execution of trades as promised, US securities regulators said Thursday.

The Securities and Exchange Commission said in an order that the app routed orders to trading firms that overcharged users to execute transactions between 2015 and late 2018.

It resulted in $34.1 million in higher customer fees, the SEC said, as they found the firm made incorrect statements to customers about these practices.

Robinhood agreed to pay the civil penalty Thursday without admitting or denying SEC’s findings.

It comes just a day after regulators in Massachusetts claimed the wildly popular app targets and manipulates inexperienced investors.

Robinhood has soared in popularity during the pandemic as it touted the lack of trading commissions in customer communications.

Yet the SEC found in their statement Thursday that these communications had not always been honest, with customers losing out on tens of millions of dollars as a result.

Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money – namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as “payment for order flow”,’ the SEC statement read.

One of Robinhood’s selling points to customers was that trading was “commission free”, but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices, it continued.