Only one month prior to the meteoric rise of GameStop, AMC, and other “meme stocks”, the trading platform Robinhood received a $65 million fine from the SEC after the government agency determined that the trading platform mislead its users from 2015-2018 regarding how the platform makes money.
Per the SEC on December 17, 2020, “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.'”
In short, this means Robinhood did not give its users the best price for the stock purchases they made, and did not disclose this to the users.
“As the SEC’s order finds, 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,” the SEC explained. “Despite this, according to the SEC’s order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors.”
Shockingly, the SEC believes that Robinhood “provided inferior trade prices that in aggregate deprived customers of $34.1 million”
CBS News notes that Robinhood has used a series of “game” tactics to attempt to persuade young retail investors to use its platform, essentially treating the stock market like a video game.
One example from the suit: To further coax customers on its platform into trading, Robinhood rewards users “with colorful confetti raining down their screens after executing trades,” according to court documents. These and other tactics are Robinhood’s way of turning serious investing into a “game,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. The alleged tactic is “not only unethical, but also falls far short of the standards we require in Massachusetts,” he said.
Robinhood said it disagrees with what Massachusetts alleged and intends to fight state officials in court.
The SEC also received more than 400 complaints against Robinhood in March of 2020, when the stock trading platform inexplicably had an outage during one of the highest performance days in history. Forbes reported:
The popular stock brokerage platform experienced an outage of its trading service on March 2 that lasted for 17 hours. Customers were unable to access their accounts and execute trades while stocks were surging higher after a period of downturn due to the coronavirus. They were also unable to reach Robinhood’s customer service for help. Though service eventually resumed, Robinhood had two additional shorter outages in March.
According to statements made by the company at that time, the March outages were the result of “stress on the app’s infrastructure,” a high volume in trading due to market volatility and a record number of sign-ups. There have been problems and outages with the service every month since March, according to Down Detector.
A class action lawsuit has been filed against Robinhood after the platform blocked users from buying stock in GameStop, AMC, and other “meme stock” companies, in what some say amounts to a decision to protect hedge fund investors at the expense of retail investors.