SEC Charges Robinhood Financial With Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution https://www.sec.gov/news/press-release/2020-321 I'll just quote: “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm”. Somehow, the old adage about the fool and his money comes to mind...
I don't know about it but I will admit I am truly humbled by what they do. They mine career websites and find job openings that reference Palentir to spot client growth to help with their constant pump up of PLTR. While that may just be one example, it does appear their tactics are novel.
And I was thinking about making a video proving that Robinhood provides better execution, at least for options. Not always, but to the point that I'm asking my wife to get some options on Robinhood first before I place orders at IB, because my IB orders move the price away from me, while sometimes she's able to snatch the same options at a lower/mid price that I suspect she might be able to get first, based on past experience. We often end up competing in a friendly way for the same options. It could be just an illusion/assumption, but I think it might be possible to show that Robinhood provides very competitive fills at times.
Regulation December 17, 2020 Robinhood Settles SEC Charges The popular trading app agreed to pay $65 million over allegations of misleading customers and mishandling trades. William Sprouse The stock trading app firm Robinhood has agreed to pay $65 million to settle charges from the Securities and Exchange Commission that it misled customers about its business model and failed to deliver on best execution of trades. “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 said. Robinhood advertised itself as a commission-free trading service, 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,” the SEC said. The SEC said increased trading prices cost customers more than $34 million, even accounting for the zero commission fees. “The settlement relates to historical practices that do not reflect Robinhood today,” Dan Gallagher, Robinhood’s chief legal officer, said. “We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.” On Wednesday, the Commonwealth of Massachusetts filed a complaint against Robinhood alleging it used “aggressive tactics to attract inexperienced investors” and “gamification strategies to manipulate customers.” Robinhood reported revenue of $180 million off of trades in the second quarter, nearly double the previous quarter, with the majority coming from options trades. The Massachusetts regulator said 68% of the company’s customers were approved for options trading despite reporting limited or no investing experience. A Robinhood spokesperson said the company disagreed with those allegations and planned to defend itself vigorously. “Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them. We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials,” the spokesperson said.
I guess this proves my point. Robinhood could not afford to provide inferior execution while negotiating with the SEC. Though not sure whether Robinhood execution can be better or just equivalent to any other broker, and how often. Would Robinhood’s partner MMs benefit from matching orders internally between Robinhood customers? I may still do some comparative testing one day.
Thanks, though the document only mentions trading shares, not options, so still lots of unknowns in this area.