A Cautionary Tale for Retail Investors: Robinhood’s $65 Million Fine

A Cautionary Tale for Retail Investors: Robinhood’s $65 Million Fine

In December, the Securities and Exchange Commission said that the trading platform Robinhood was not forthright with customers on how it makes money and has fined the platform $65 million. This according to a recent article in MarketWatch.

The article reports that, according to the SEC, Robinhood “wasn’t forthright with customers on how it makes money through its commission-free platform and didn’t live up to its duty to ensure users got the best terms on trades.”

Robinhood, which is neither admitting to or denying the SEC charges, has agreed to pay the penalty and also cover the cost of an independent compliance consultant that will “review its approach when dealing with companies to execute user trades,” the article notes, adding that the company has its sights on a initial public offering.

According to a company statement, the fine relates to past practices and is not reflective of the current business. But the article notes that some consumer advocates see it differently. One advocate—Barbara Roper, director of investor protection at the Consumer Federation of America, commented that Robinhood seems “to be more focused on making a cool app than having a broker-dealer that complies with securities laws that investors get the best available price when they trade.”

“There are lessons like the potentially hidden cost of $0 commissions and unclear financial risks,” the article says, adding, “all things worth remembering at a time when Robinhood isn’t the only place to trade without commissions and more people are trying to play the market with a couple of thumb swipes.” Specifically, it explains that Robinhood, like other retail broker-dealers, is not carrying out trades itself but rather channels trade orders to companies that do it for them. But, according to the SEC, this can create a conflict of interest—where the brokerage could put its own financial interests over a customer “who just wants a quick trade.”

Roper says, “It’s a reminder that $0 doesn’t mean no cost. You’re paying. You just don’t know how you’re paying. This is not a charitable operation. It’s a money-making business.”

The article notes that the SEC announced the $65 million penalty one day after Massachusetts state financial regulators filed their own administrative complaint against Robinhood.