Robinhood to pay US$65m to settle SEC claims it mishandled trades

The Robinhood platform has been very popular among investors. Photo / Getty Images

The trading app Robinhood has agreed to pay US$65m (NZ$90m) to settle charges from US securities regulators that it failed to provide its customers with the best prices for trades on its platform.

The Securities and Exchange Commission said that while Robinhood had promoted its services as "commission free", its customers' orders were processed at prices "inferior" to other brokers.

The commission also said the company failed to disclose payments it received from high-speed trading houses that process its orders, payments that may have influenced decisions over how Robinhood trades are executed.

The commission found that Robinhood had deprived customers of $34.1m because of those payments, which led to the inferior pricing practices, even when taking into account the fact its customers were not paying a commission to trade.

An analysis by the SEC found that Robinhood users would have got significantly better prices by placing orders with other brokers. For orders of more than 100 shares, the difference was worth more than the $5 trading commission the other broker would have charged. For orders of more than 500 shares, customers would have been $15 better off on average, the SEC found.

The regulator alleged that Robinhood "wilfully" violated the Securities Act by making statements that were misleading to customers about how it made money.

Robinhood makes money by selling trades to market makers, a practice called payment for order flow.

The trading app repeatedly failed to disclose that it receives such payments from trading firms for routing its customers' orders, the SEC said. The regulator said that Robinhood had made these "false and misleading statements" during a period of rapid growth. Robinhood did not admit or deny the SEC findings.

Robinhood said in a statement that the practices under scrutiny in the settlement "do not reflect Robinhood today". The company said it was working with additional market makers to improve its trading executions.

It added: "We recognise 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."

Volatile markets, low-interest rates and increased time at home have encouraged more retail investors into the equity markets. DIY investment providers have seen record sign-ups, and trading volumes double or triple their previous averages.

Robinhood has drawn in 13m customers, in part because of its easy-to-use app and promise of zero-commission stock trades. Retail enthusiasm in the markets has helped push shares in popular technology stocks to high valuations, and Citadel estimates that retail investors now account for more than 20 per cent of US stock market trading volume.

The SEC settlement comes the day after the Massachusetts Securities Division filed a complaint accusing Robinhood of "gamifying" investing and not providing proper protections for novice investors.

- Financial Times