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SEC charges Robinhood $65M for misleading customers about revenue sources

457 points by ericliuche 6y ago

deleted 6y ago
[deleted]
chairmanwow1 6y ago
I know this may be a slap on the wrist for Robinhood, but honesty the SEC is one of the branches of government that I trust almost as much as the FDA. I appreciate the work they do and I hope they continue it.
- danielfoster 6y ago
  So you place a lot of trust in the SEC or you don't?
  - plouffy 6y ago
    He/She does.
    - phillnom 6y ago
      I didn't downvote but wanted to suggest just using "they" when you don't know.
      - colejohnson66 6y ago
        I’d recommend “OP” and “GP” as they are pretty common acronyms on the internet
        6gvONxR4sf7o 6y ago
        Those always confuse me even more. Is OP the top level comment or the post we’re commenting on? Different people seem to use it differently, which isn’t super useful for communicating. And is GP the comment two above yours or two above mine?
        23B1 6y ago
        I like "Friendo" or "Bud" personally
      - simias 6y ago
        Correcting people when they use wrong pronouns is distracting but I get it, but can we at least not correct people for not using the right variety of neutral pronouns?
        whimsicalism 6y ago
        Not to really get into this debate, but I will note that "they" is more neutral than s/he.
        LanceH 6y ago
        But not necessarily correct, right? And what is correct? It's apparently whatever the addressee chooses these days, so good luck.
        whimsicalism 6y ago
        > But not necessarily correct, right? I'm pretty sure they is universally correct? No need to politicize this.
      - deleted 6y ago
        [deleted]
- gk1 6y ago
  Does this cut them off from their revenue source? That would seem a bigger issue for them than the fine.
  - fwsgonzo 6y ago
    Looks like it was a cease-and-desist
  - rwmurrayVT 6y ago
    They only cost customers $35kk in execution compared to other brokers. I suspect they will take a hit in revenue, but the order routing will still be valuable.
  - gruez 6y ago
    AFAIK payment for order flow is legal, and most of the other brokers do it as well.
- karpodiem 6y ago
  lol, you must be a TSLA shareholder. We live in a golden age of fraud. Look up $PEN, $OSTK, pretty much anything published by Muddy Waters.
- befeltingu 6y ago
  Why do you trust the FDA?
  - bun_at_work 6y ago
    A good reason to trust the FDA is that they have contributed to the safest food in the world! Our strict food regulations in the USA make things like trichinosis very difficult to spread around.
    - Kranar 6y ago
      What evidence is there that U.S. food is safer than Japanese food, or even say Canadian food? I don't have strong evidence but I don't regard U.S. food to be particularly safe relative to most first world countries. It's not terrible by any means and you're right in that you won't get any immediate damage from anything you eat, but I suspect most other first world countries have food and safety and health standards that result in better health outcomes over a long period of time compared to U.S. food. [EDIT] After doing some minimal research it appears my intuition is correct, at least with respect to foodborne illness, the U.S. is certainly good compared to poverty stricken nations, but compared to most of Europe, Canada, Australia it has much higher rates of foodborne illness: https://en.wikipedia.org/wiki/Foodborne_illness#Comparison_between_countries https://en.wikipedia.org/wiki/Foodborne_illness#Comparison_b... The deaths in the U.S. is the highest, but what's even more interesting are the hospitalizations. U.S. hospitalizations are among the lowest and one has to wonder why that is given that it has the highest death rate. It wouldn't be unreasonable to suspect that because of how expensive the U.S. health care system is, Americans who do get sick avoid going to the hospital altogether. That is admittedly simplified speculation on my part, but it's a starting point for further investigation.
      - gareim 6y ago
        At a 10x difference, it should clue you in that something is wrong. Choice quotes from a UK Gov page: > A report published by the FSA has found it is not possible to compare foodborne disease rates effectively between countries. > The report concludes that attempting to accurately compare different countries’ foodborne disease rates is an almost impossible task. The only way you could attempt this would be for different countries to have the same type of study with the exact same study specifications, over the same time period. Even then, differences in underlying surveillance data available in each country could cause issues, particularly in terms of determining what proportion of IID cases are due to food. https://www.food.gov.uk/news-alerts/news/report-into-international-foodborne-disease-rates-published https://www.food.gov.uk/news-alerts/news/report-into-interna...
- whimsicalism 6y ago
  > the SEC is one of the branches of government that I trust almost as much as the FDA Hm. I made this comment elsewhere but: The SEC has big structural problems. Way too close of ties with the people it is supposed to be regulating. Take the example of this SEC investigator [0] whose boss got a call from one of those Wall Street hedge funds under investigation and suddenly he's fired! Mysteriously, that boss gets a job with the same firm a few months later. Oh, the kicker? The person who made that call from the hedge fund? Appointed to be the SEC chair in 2013. [0]: https://en.wikipedia.org/wiki/Gary_J._Aguirre https://en.wikipedia.org/wiki/Gary_J._Aguirre
  - NoOneNew 6y ago
    Well, here's my issue with the SEC that I admittedly don't have a good solution. https://www.federalpay.org/employees/securities-and-exchange-commission https://www.federalpay.org/employees/securities-and-exchange... The general purpose of the SEC is to investigate, fine and in general "stop" financial crimes in the financial market. This, in theory, requires said investigators to be smarter than the perpetrators or at least somewhere on par. While these folks are paid really well on average... this isn't "fuck you money" like on Wolf of Wallstreet. Even "poor fuck you money" is better than what they make. While I won't dismiss the need for a lot of attorneys and accountants in their profession, 333 examiners doesn't seem adequate against a $440k average salary industry with 176k employees 2018 numbers (https://www.osc.state.ny.us/sites/default/files/reports/documents/pdf/2018-11/report-6-2019.pdf https://www.osc.state.ny.us/sites/default/files/reports/docu...). Unless there's much more overlap than I'm imagining. I mean seriously, if you're smart enough for the financial industry, you need to have a much higher moral code to take the less than half rate of average salary compared to the people you're investigating. Which I'm not knocking. I always respect people who take a moral high ground stance and try to do some actionable good, especially if it's at a detriment to their own wallet. It's just, expectations need to tempered with their overall capabilities. On top, agreeing with you on structure, what kind of hell do some of these folks experience working in a government environment? How many get salty real fast and get all pissed off from the shit they deal with bureaucratic wise along with shitty pay compared to the industry's employee? There was a line from Burn Notice that I've always attributed to this, "Fighting for the little guy is for suckers". So yea, can we all really trust the SEC? Maybe... but can you really blame them by too much regarding "issues" granted that most of any industry, especially tech & finance, is about jumping to the next better paying job? I mean think of this scenario, "You're going to get fined no matter what happens today. But I can reduce it by half if a moving box full of cash magically appears on my back porch."
- eru 6y ago
  Are you sure the current FDA is worth your trust? Or are you being cynical? The pre-1962 FDA had perhaps the better regulatory framework: back then new drugs had to show safety, now they have to show safety and efficacy. Off-label prescription show that efficacy requirements are not necessary in practice, and just needlessly delay drugs and make their development more expensive.
  - bagacrap 6y ago
    I for one am glad that pharma companies aren't allowed to peddle prescription meds that don't actually work. If there's some other use case for that drug (your "off label" application) then it will pass through the approval process with efficacy proven for that. I think it's more of a dilemma that off label scrips aren't used more often. Since there's zero monetary incentive to prove efficacy for a second application and doctors generally prefer officially sanctioned uses, lots of patients miss out on helpful treatment.
    - eru 6y ago
      You know that there is no approval process for off label prescriptions? Doctors just use their so called clinical judgement. The suggestion would be to go back to pre-1962 regulations, and put normal and off-label prescriptions on the same footing.
gamerDude 6y ago
If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?
- deleted 6y ago
  [deleted]
- Areading314 6y ago
  I believe they could still be sued for these damages
- nojito 6y ago
  SEC can't provide retribution to customers. That's a job for the courts.
  - Technically 6y ago
    Courts don't do much good here either. Realistically, the US does not have a way to hold powerful entities to account for every day americans.
  - colejohnson66 6y ago
    But who would bring the suit to the courts? Just some random law firm starting a class action? We all know how that turns out (in terms of retribution[a]). There has to be a better way. [a]: Because class actions technically aren’t about retribution, but discouragement
- jnmandal 6y ago
  The sad truth of this is that this is just three letter agencies doing as three letter agencies does. I don't think anyone at the SEC was looking after consumers here. If they were, they would similarly investigate other brokerages with the same practices (which is many).
  - 6y ago
dsbleia 6y ago
Will this kill their public offering?
- dj_mc_merlin 6y ago
  Definitely not.
- jariel 6y ago
  More likely to help it, because it clears the cloud of an impending investigation and the outcome is a little blip. Investors like things to be cleared up, even with damages, because the damages can be seen as a limited, tangible thing they can just write down and move past.
jgalt212 6y ago
This is probably why VC's have historically shied away from heavily regulated industries. It's just too easy for " insanely ambitious" founders to run afoul of the rules and laws. Fortunately for AirBnB, these rules and laws weren't enforced all that often.
- dimitrios1 6y ago
  This is inaccurate. Some of the most successful startups in recent memory made their bankroll by skirting regulations. It eventually catches up to them, but by then they've made a decent sized war chest to comply and plow forward. Eventually the startup just becomes the next established player. Rinse and repeat.
  - jnmandal 6y ago
    Yeah I mean, there is practically a cookie cutter framework for building successful startups based on industries with regulations that are protective or restrictive (depending on you look at it) enough to skew markets.
  - jgalt212 6y ago
    Please cite some examples from "heavily regulated industries".
    - whimsicalism 6y ago
      Uber is the canonical one.
    - dimitrios1 6y ago
      The one you are literally commenting about. Uber. Medical Software / Device startups. Energy startups. The list is too long. A basic search will yield you bountiful results.
- travisoneill1 6y ago
  In AirBnB's case were there actually any preexisting rules? It would seem strange to have rules in place governing short term rentals before there was really even a market for that.
gbronner 6y ago
This can and will be fixed by hiring the compliance department from another broker. Etrade just merged with MS, and a lot of the etrade people are in in the SF Bay Area....
- bagacrap 6y ago
  they have agreed to bring in an "independent third party" although I have no idea how they can really remain independent when they're ultimately collecting a check from RH.
  - bun_at_work 6y ago
    They are independent because there exists no preexisting conflict of interest between the third party and RH. That's what independent means in this case.
fortran77 6y ago
Their customer base is still worth a lot--think of all the odd-ball crypto derivatives Robinhood can pitch them. The $65MM may turn out to be a small cost of doing business.
remote_phone 6y ago
I wish the SEC would force companies to plead guilty instead of weasel out and pay a fine without admitting guilt. It doesn’t help anyone. If Robinhood is engaged in fraud or lying to their customers they should be forced to admit guilt and all the consequences from this. All this is is a slap on the wrist and political theater and I’m sick of it. I want some real teeth even if it results in less fine being paid. Or have them pay a crippling fine, one that takes away most of their cash. Something with meaning, not a meaningless fine
donohoe 6y ago
I feel that if a company is paying a fine of 1M or more, someone should also be going to jail - otherwise there is not going to be any meaningful accountability.
- bhelkey 6y ago
  > Robinhood agreed to pay $65 million to settle the charges. ... Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty. A slight quibble, Robinhood and the SEC settled. There was no fines issued. I do think that the threat of being sent to jail would be a much better deterrent than the threat of losing 2x the money gained by doing something illegal.
- tptacek 6y ago
  Get that law passed, bearing in mind that half the country is represented by a political party that is opposed in principle to financial regulations of almost any sort.
  - idlewords 6y ago
    And the other half by the Republicans!
    - tptacek 6y ago
      I am dead.
- nbardy 6y ago
  Agreed. Same as 2008 crash. The executives that made these decisions are most likely ending up ahead on their fat salaries. We’ve got to hold decision makers accountable.
ehejsbbejsk 6y ago
I believe this is to punish RH for offering zero commissions. Especially on options. I seriously think what RH offers, for anyone who’s traded options on the retail side, is a game changer.
- cj 6y ago
  Sometimes what's good for the 1 person isn't good for everyone. For example, if a bank starts giving out 0% interest 100 year mortgages (with some fine print that gives them some obscure revenue source to make it possible for them to make such an appealing offer) the bank should still get in trouble in my opinion if the consumer isn't informed about how they're getting such an amazing deal, because you're removing the consumer's ability to make an informed decision.
  - ehejsbbejsk 6y ago
    I know what you want to say but that’s an awfully bad example. I would take out that loan 10 times over.
    - ac29 6y ago
      So would everyone else, and it would massively push up the price of housing. I think that was the point.
    - jellicle 6y ago
      I believe for this example to be correct, the bank would also be hiding in its documentation that you have to pay an annual $100,000 mortgage paperwork fee for this 0% loan.
- eru 6y ago
  Alas, for most people, especially retail and even more especially options, it's better if they trade less.
  - ehejsbbejsk 6y ago
d33lio 6y ago
They deserve every single bit of this. Please use a real reputable broker / platform like Schwab. Sure, they don't have a mobile app - but they also don't sell your trading info to front-runners, actively manipulate the charts they show you to influence your decisions and let their platform crash and just tell you "thats how things go". edit - I didn't realize Youtuber RH fanboys read hacker news...
- argonaut 6y ago
  Schwab also receives payment for order flow (AKA selling your orders): https://www.schwab.com/legal/order-routing-1 https://www.schwab.com/legal/order-routing-1. In fact, every retail brokerage I'm aware of receives payment for order flow. Schwab also has outages although not as bad as Robinhood was this year.
  - d33lio 6y ago
    Sure, but they don't promote buying crypto as an "investment". Tbh, I don't really have the patience to argue over this.
    - renewiltord 6y ago
      Then don't, because clearly you made incorrect claims to start with.
    - vel0city 6y ago
      > An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. https://www.investopedia.com/terms/i/investment.asp https://www.investopedia.com/terms/i/investment.asp Buying Beanie Babies or tulip bulb futures or cryptocurrencies because you expect the value to increase over time is absolutely an "investment". They might be good or bad ideas to invest in, but they're without a doubt an investment.
  - 6y ago
deegles 6y ago
What is the purpose of such small fines? Their valuation has gone from 1.3B in 2017 to 10.2B in August 2020 [0]. Only having to pay a $65m fine for that amount of growth sounds like a great deal. /s Obviously it's more relative to their revenues but it still seems like peanuts. [0] https://www.businessofapps.com/data/robinhood-statistics/ https://www.businessofapps.com/data/robinhood-statistics/
- andris9 6y ago
  I assume they can't pay the fine with their stock
  - eru 6y ago
    Indirectly, they can: issue some more stock, and pay the fine with the cash earned.
- SpicyLemonZest 6y ago
  The purpose of such small fines is to serve as a proportional deterrent to the misconduct they committed. The charge is that Robinhood falsely claimed their prices were lower than the competition; they shouldn't have lied, but that's hardly the crime of the century.
brookshalladay 6y ago
I always wondered about the name 'Robinhood' since it applies taking from the rich and giving to the poor. Maybe it could be renamed to Sheriff of Nottingham.
- 40four 6y ago
  I nominate this for HN joke of the day.
- malux85 6y ago
  It’s a trap. It implies it, but doesn’t guarantee it. Everyone wants to be that hero in the narrative, and by the time the people figure out they have been shirked (but not directly lied to) your company has been acquired and you’re out with bags of money. Clever, unethical and legal (by the thinnest margin)
- mszcz 6y ago
  Yeah, it seems it's a recurring theme nowadays with companies - you either die a hero or live long enough to see yourself become the villain. And this time the company is named Robinhood? You really can't make that stuff up.
- VRay 6y ago
  Well, to be fair, before Robinhood came along it was still pretty standard to pay huge fees AND have your order flow sold. I wish they had been straightforward about what they're doing instead of explicitly lying on their website about where their money comes from, though.
- Stupulous 6y ago
  I believe the idea is that they are taking access to finance from the rich and giving it to the poor. Commissions are often flat dollar amounts, so the more money you have, the less significant they are. Charging a percentage (which this is effectively doing) benefits small trades and hurts large ones. And I believe they still meet or beat market rates, they just find savings that they don't pass along to the traders. No doubt the Robin Hood of myth turned a profit as well.
sschueller 6y ago
How many people will be going after RH when Telsa stock crashes (to reasonable numbers) and they can't sell as fast as all the front runners?
gigatexal 6y ago
If it’s free you are the product. Why is that so hard for people to grasp?
- Wheaties466 6y ago
  so now we're victim blaming for robinhood not disclosing where they make money?
  - gigatexal 6y ago
    Nobody is the victim here. People got a free service to buy stocks and Robinhood sold that deal flow to bigger investors.
    - nrmitchi 6y ago
      The claim is that they sold that deal flow in a sub-optimal way that is expressly prohibited from them doing, and it led to consumers not getting the price that they, by law, should have been given.
      - gigatexal 6y ago
        If that’s indeed the case then we should throw the book at them. Breaking the law is different than selling a service for free and monetizing your consumers.
        nrmitchi 6y ago
        > Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934 Oh, don't worry. Robinhood agreed to sign a piece of paper agreeing that it wouldn't break the law any more. And just to be clear, this isn't the first time that Robinhood has blatently broken the existing laws and regulation. The "infinite money" "glitch" is a situation which is straight-up codified to be not allowed (for obvious reasons). They were either incompetent or negligent. They attempted to release a "bank account" product and claimed it would be covered by insurance which it would not be. Again, either incompetence, or negligence.
_cs2017_ 6y ago
ELI5: why exactly did the clients get bad execution? Does sending order flow to trading firms in itself cause unfavorable execution? Or did the trading firms treat order flow from RH differently than from other sources? Or is it something else? And does the fact that RH was receiving large payments for order flow impact the quality of execution?
- bagacrap 6y ago
  Payment for order flow trade never helps the consumer. RH accepted unusually large amounts of it. They harmed the consumers to the tune of $34m relative to normal practices. They lied about what they were doing.
  - Kranar 6y ago
    This is incorrect. The benefit of order flow to the consumer is additional sources of liquidity. If a consumer submits an order to buy 500 shares of AAPL for $100, there may only be 100 shares available on the public market at that price in which case the price of AAPL will increase from $100 to at a minimum $100.01. The way pay for flow works is that firms can execute against that order agreeing to fill any portion of it up to and including the full 500 shares. Furthermore by agreeing to pay for flow, it's a criminal offense for my firm to use that information to front run the order by buying it on the open market without first executing against the client. The allegation made by the SEC against Robinhood is that some kind of indirect front running was performed and perhaps even facilitated by Robinhood. The problem is that the SEC is pretty weak overall, and if their allegation is true then Robinhood should be punished much more severely than this $65M fine given that Robinhood and others likely profited at a minimum some $40M dollars.
    - _cs2017_ 6y ago
      The quality of comments in this thread is atrocious. I wonder what makes so many presumably technically trained people, to make confident claims about topics on which they very clearly have no bloody clue.
  - 6y ago
jamesmehaffey 6y ago
It is a shame that these types of tech companies are always churning up such bad publicity... they literally cannot afford to be making these sorts of unforced errors. It just makes it that much more difficult for all the innovative and honest startups who are trying to bring about positive disruption. cutting corners and misleading your customers is not innovation.
- _jal 6y ago
  It isn't just finance startups. With one exception, every startup I've worked for has done something I considered at least sketchy. The difference is most of them didn't have a federal agency with teeth paying attention. It is, honestly, something I struggle with a bit. I don't like it, but it seems like the state of play is that "a little bit" of cheating is expected, and those who don't are at least operating at a handicap. Exactly how wide that gray area is depends on who is advising you, and sometimes results in shops like early-Uber. One of my least-favorite aspects of SV.
  - Bayart 6y ago
    Bryan Cantrill has a talk on YT on ethics in software [1]. And as I remember it the take away is that the way we think about problems isn't very conducive to obeying the law, or being good to people in general. And I've got to say the amount of people I see thinking of regulations, social norms or morals as « cruft » is pretty alarming. [1] https://www.youtube.com/watch?v=0wtvQZijPzg https://www.youtube.com/watch?v=0wtvQZijPzg
  - bostik 6y ago
    It's not just startups and/or SV. People generally don't like me bringing this up, but there is a good rule of thumb for everything in life: The only people who play fair are those who don't know how to cheat well enough.
- quickthrowman 6y ago
  How is a discount brokerage a tech company? They’re .. a brokerage, just like Schwab or E*Trade.
fionic 6y ago
I wish some branch of government would hold Facebook accountable with similar demeanor.
thoughtstheseus 6y ago
Small fines will continue to encourage this behavior. Robinhood was clearly and consistently not acting in the best interests of its clients and misrepresented pricing. Now it’s worth billions.
- joshxyz 6y ago
  The ol' break the rules and expect the fines approach
- jtdev 6y ago
  Can we apply this thinking to all of the crooked "financial advisors" and mutual fund managers ripping off working class 401k holders?
jtdev 6y ago
This is comical... As a Robinhood trader, I feel much less "misled" than I did when I was forced to invest in American Funds through an employers 401k plan. The mutual fund managers were scraping piles of money off my and my coworkers retirement nest-eggs and their mutual funds were consistently underperforming the market. The SEC couldn't be bothered to regulate where it matters, they're just gatekeepers and retail investors are not well liked by the power brokers.
IanDrake 6y ago
Two years ago I left IT and started my own wealth management company...and now I'm back. I can tell you, the regulations on the retail side of finance are nonsense and help no one. Like gun control, bad actors don't care about your laws. The only people who are regulated are the honest ones, and the amount of regulation can put them out of business, or even dissuade them from being has honest as they'd like. If RH lied about how they're compensated, then they are certainly guilty, but the harm to consumers is just the tip of the iceberg. Consider how much RH has harmed all the honest financial advisors who had to compete with a "free" service that hides their cost to consumers. If I had lied to one client about how I was compensated, bye bye license.
- renewiltord 6y ago
  That's usually how regulation works. Regulation is a moat. You want it to be really really harsh and then be one of the first few on the inside. Because by adding a flat startup cost to an industry you make it impenetrable to upstarts. Then you can use a venture-funded company to get inside the moat. But once there are a few inside, the next person investigating will realize that if they also enter the moat everyone will be commodified. They will lose their money too. They'll have to compete and like Thiel says in Zero to One, you don't want competition. Regulation is good for protecting your business and for helping big companies survive upstart disruptors. What happened to you is by design.
xivzgrev 6y ago
This is why fintechs have to have strong legal & compliance teams, especially when you reach a certain size. This reminds me of their debacle where they launched a checking product with a high interest rate and promising it was backed by the federal government...without ever asking the government if that was true.
efficax 6y ago
It's very late stage capitalism for a company named robinhood to actually be stealing from the (relatively) poor to enrich themselves! You love to see it.
notyourday 6y ago
That's just a cost of doing business. Want to fix this as the problem: * bar every officer and every director from serving as an officer or a director * make the fines 30% of revenue
sonotmyname 6y ago
> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. $65M penalty for $35M in misbehavior. That is how you get Wall Street to pay attention. More like this please!
- slg 6y ago
  Unless the likelihood of getting caught is less than 50% in which case this was still the smart financial move for the company based on expected value. The way to get people to pay attention is to hold people involved in corporate misdeeds personally liable.
  - beambot 6y ago
    50% x (-$65M) + 50% x $34M = -$15.5M You'd need better than 50-50 odds. ;)
    - iaw 6y ago
      Math is off it's 0.5 * -65M + 1 * 34M = +1.5M They get the +34M 100% of the time, not 50%, they didn't have to surrender it.
- jellicle 6y ago
  No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions. So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.
  - notfbi 6y ago
    The 34 million calculation is only for "certain" orders. I think this means some trades would be advantageous under the RH model (small trades where a $5 fixed commission would overwhelm any percentage), some trades would be disadvantageous under the RH model (very large value trades), and they only summed the comparative fees on the disadvantageous trades. This might make sense: if users were knowledgeable and had multiple brokers, they may execute at the better trade-specific broker for each trade, so adding up just the potential bads gives some perspective. But on the other hand, it's not a perfect indicator for Robinhood's net gain as its omitting trades where Robinhood's structure leads to lower commission.
miguelmota 6y ago
As long as profits are greater than fines, these penalties aren't enough to incentivize good behavior.
- sonotmyname 6y ago
  > The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. Sooooooo the fine is nearly 2x the cost to consumers due to malfeasance. That should cover your concern here.
  - jellicle 6y ago
    No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions. So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.
notional 6y ago
> 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. 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. Reading through the comments had me confused, but it really boils down to a misleading FAQ page. All of which is pretty damn funny because of how innocuous I view FAQ pages to be.
- aabhay 6y ago
  This is a very tame reading of the mistake. Telling customers that their stock orders would be executed at prices matching other firms, when in fact Robinhood was executing those orders at inferior prices -- that's a big misrepresentation. You're paying extra for something while being told that you're not.
  - baby 6y ago
    I don’t get it. If you sell stocks at the market price it wouldn’t be the market price but something cheaper that RB would buy and then sell at the real market price?
    - wocram 6y ago
      Retail orders generally trade with against market makers off-exchange, between the quoted market price. If the quote is Buy @ $1.00 x Sell @ $1.01, a retail order would be able to buy at a price like $1.0099. That $.0001 savings is known as "price improvement". Separately, the market maker pays a negotiated ahead of time rate to Robinhood for sourcing the order, aka "payment for order flow".
    - jellicle 6y ago
      Not Robinhood on the other end of the transaction, but yes. If you and someone else both mashed SELL at the exact same instant, they'd get $48 for their stock and you'd get $47.99 and your confirmation screens would both say "we sold your stock at the highest price we could find". In exchange for sending their customers to a place where they'd only get $47.99 instead of $48, Robinhood received direct cash payments.
allenz 6y ago
To add a bit of context: brokerages like Robinhood send buy/sell orders to national exchanges and to private trading firms e.g. high-frequency traders. Private firms provide price improvement: orders that execute at prices better than the national exchange. All brokerages have a duty of best execution, including a duty of price improvement. Brokerages can also receive payment for order flow from private firms, as long as it does not interfere with best execution. However, "Robinhood explicitly offered to accept less price improvement for its customers... in exchange for receiving a higher payment for order flow," which is illegal. Full order: https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf
- vslira 6y ago
  In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
  - sesuximo 6y ago
    More like you want to buy something that would cost 100, and RH got paid 5 to send your order to a trading company, and that trading company executed at 101.
    - aynyc 6y ago
      RH orders aren't LIMIT HELD orders?
    - room500 6y ago
      No. If you had a limit buy, Robinhood would never exceed your limit. Period. That would be highly illegal. This is more like you want to buy something at 100. Robinhood then goes to the market and looks at all the vendors. The vendors are selling at various prices. Robinhood has a relationship with one of the vendors so they went there and that vendor was willing to sell at 98. However, a vendor down the street (that Robinhood doesn't like) would have been willing to sell at 97. None of that is illegal. What the SEC is arguing here is that Robinhood didn't tell the customers this when they advertised "commision-free" trades. In Robinhood's eyes, they didn't charge a commission, so this was accurate. But in the SEC eyes, the customer was paying a "hidden" commission because they would get a slightly worse price than if they went with a different broker. Imagine you are Fidelity... All of a sudden, you have Robinhood advertising "commission-free" and you just lost a good chunk of business from retail traders. You then complain to the SEC because the advertising here is not entirely accurate - the customers might have even gotten a better price with Fidelity - even if you add in the commission. FTA: > The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
nps1 6y ago
I would say that $65M is a good investment from Robinhood perspective. As it has grown significantly since then due to this. The fact that SEC enforcement is 2 years in a high frequency world is in itself means it is just token enforcement. The trading world we should have enforcements as the trade happens.
pdovy 6y ago
The payment for order flow piece is a little confusing as presented in the press release, but the actual SEC order makes this a little clearer: https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf Basically there are two ways broker-dealers that want to do business with Robinhood or similar firms can provide incentives: 1. Pay the flow provider (i.e., Robinhood) some amount per order/share 2. Provide price improvement over the prevailing market price to the end customer (which the provider can then use to market themselves as providing good execution). Ultimately both of these are coming out of the broker-dealers bottom line, so the unit economics have to work - (1) and (2) have to leave a positive profit margin on average. Typically a firm like RH would be monitoring execution quality and negotiating price improvement requirements with the broker-dealer. This order finds that RH failed to do that, and likely as a result of their demand for high payment for the order flow, (2) was below their peers while they were stating otherwise in their marketing materials.
tptacek 6y ago
They were fined by FINRA last year for best-execution slipups as well: https://www.finra.org/sites/default/files/2019-12/robinhood-awc-121919.pdf https://www.finra.org/sites/default/files/2019-12/robinhood-...
maerF0x0 6y ago
Does all this inferior execution boil down to Market orders? I learned early on (iirc from Jim Cramer!) to use limit orders. There would never be an inferior execution with limit orders, right? EDIT: this comment seems to speak to the topic: https://news.ycombinator.com/item?id=25456763 https://news.ycombinator.com/item?id=25456763 according to ^^ even if you limit buy for $100 they have a duty to get you $99 if it's available.
- nrmitchi 6y ago
  A limit order just specifies the maximum that you are willing to spend per share. For example, putting in a limit order at $100 for a share of "X", means that you won't pay more than $100. If the best available price for "X" at the time is $98, and Robinhood gives you a share for $99, that is still an inferior execution.
pochamago 6y ago
I confess I don't really understand the controversy here. I thought everyone who cared was already aware of how RH makes its money, and everyone who didn't was still getting a better deal per trade than they would have with traditional brokers. I ended up switching away from RH once my trades for big enough that other brokers were effectively taking less, but I'm still really grateful that I was able to learn the ins and outs of standard speculation with a $500 account
- tptacek 6y ago
  * Basically all of the brokerages make money this way. * Robinhood took a bigger slice of the pie than the other brokerages did. * Robinhood claimed in marketing materials that they were not taking more of the pie. * Even factoring in the fee savings, Robinhood took so much of the pie that you'd get a better deal at other brokerages. The issue on HN is always going to be a litigation about PFOF itself. But that's not the SEC's complaint here; rather, it's that when you enter into a PFOF rebate deal, you dial in profits for yourself against savings for customers. Everybody does that, but Robinhood both (1) turned the dial way towards themselves and (2) claimed otherwise.
- gist 6y ago
  The dollar amount that any Robinhood customer lost pales in comparison to the money they can lose when buying stocks in general ie gambling no way around it. The entire industry as some may know is built on 'do your homework' and 'hold long term' is basically a big shared delusion gamble. The majority of people will make money if the market goes up and lose money if the market goes down.
Alupis 6y ago
How is this company still around? How many times have they been in trouble with some government agency, SEC or other? From pretending to be a bank[1], to having a bunch of accounts looted and no ability to stop it[2], now this, and I'm sure others I'm forgetting right now. It seems this company is really not a smart place to park any serious amount of money with. They don't take their responsibilities very seriously; carelessly flaunting the law and financial regulations. [1] https://www.axios.com/robinhoods-new-checking-account-b2b0df32-40c6-4bd1-b336-2408b27f16b0.html https://www.axios.com/robinhoods-new-checking-account-b2b0df... [2] https://www.bloomberg.com/news/articles/2020-10-09/robinhood-users-had-accounts-looted-say-there-s-no-one-to-call https://www.bloomberg.com/news/articles/2020-10-09/robinhood...
goshx 6y ago
What is the best way to migrate away from Robinhood?
- arduanika 6y ago
  Buy index funds and hold :)
toptick 6y ago
The fact that Robinhood routed to these wholesalers was always easy to see... it’s in their SEC rule 606 reports. This info was buried deep on their site, but you can alway use a search engine to find it. You just had to know where to look. They took payment for order flow (PFOF). So do many of the cheap brokerages on the street. To me, the funny part is that the old school wall st institutions Robinhood is supposedly disrupting do not take payment for order flow. Morgan Stanley and Merrill will not take it. They go for the best execution quality always. Although, I do not agree that this practice is necessarily illegal... there’s a simple argument to make: by taking payment over price improvement the broker is able to provide a lower commission. The all in price could still be better for the customer. Robinhood is not skilled enough to navigate this issue though. From a guy that used to run best ex at a wall st firm...

457 points by ericliuche 6y ago

deleted 6y ago

[deleted]

I know this may be a slap on the wrist for Robinhood, but honesty the SEC is one of the branches of government that I trust almost as much as the FDA. I appreciate the work they do and I hope they continue it.

danielfoster 6y ago
So you place a lot of trust in the SEC or you don't?
- plouffy 6y ago
  He/She does.
  - phillnom 6y ago
    I didn't downvote but wanted to suggest just using "they" when you don't know.
    - colejohnson66 6y ago
      I’d recommend “OP” and “GP” as they are pretty common acronyms on the internet
      - 6gvONxR4sf7o 6y ago
        Those always confuse me even more. Is OP the top level comment or the post we’re commenting on? Different people seem to use it differently, which isn’t super useful for communicating. And is GP the comment two above yours or two above mine?
      - 23B1 6y ago
        I like "Friendo" or "Bud" personally
    - simias 6y ago
      Correcting people when they use wrong pronouns is distracting but I get it, but can we at least not correct people for not using the right variety of neutral pronouns?
      - whimsicalism 6y ago
        Not to really get into this debate, but I will note that "they" is more neutral than s/he.
        LanceH 6y ago
        But not necessarily correct, right? And what is correct? It's apparently whatever the addressee chooses these days, so good luck.
        whimsicalism 6y ago
        > But not necessarily correct, right? I'm pretty sure they is universally correct? No need to politicize this.
    - deleted 6y ago
      [deleted]
gk1 6y ago
Does this cut them off from their revenue source? That would seem a bigger issue for them than the fine.
- fwsgonzo 6y ago
  Looks like it was a cease-and-desist
- rwmurrayVT 6y ago
  They only cost customers $35kk in execution compared to other brokers. I suspect they will take a hit in revenue, but the order routing will still be valuable.
- gruez 6y ago
  AFAIK payment for order flow is legal, and most of the other brokers do it as well.
karpodiem 6y ago
lol, you must be a TSLA shareholder. We live in a golden age of fraud. Look up $PEN, $OSTK, pretty much anything published by Muddy Waters.
befeltingu 6y ago
Why do you trust the FDA?
- bun_at_work 6y ago
  A good reason to trust the FDA is that they have contributed to the safest food in the world! Our strict food regulations in the USA make things like trichinosis very difficult to spread around.
  - Kranar 6y ago
    What evidence is there that U.S. food is safer than Japanese food, or even say Canadian food? I don't have strong evidence but I don't regard U.S. food to be particularly safe relative to most first world countries. It's not terrible by any means and you're right in that you won't get any immediate damage from anything you eat, but I suspect most other first world countries have food and safety and health standards that result in better health outcomes over a long period of time compared to U.S. food. [EDIT] After doing some minimal research it appears my intuition is correct, at least with respect to foodborne illness, the U.S. is certainly good compared to poverty stricken nations, but compared to most of Europe, Canada, Australia it has much higher rates of foodborne illness: https://en.wikipedia.org/wiki/Foodborne_illness#Comparison_between_countries https://en.wikipedia.org/wiki/Foodborne_illness#Comparison_b... The deaths in the U.S. is the highest, but what's even more interesting are the hospitalizations. U.S. hospitalizations are among the lowest and one has to wonder why that is given that it has the highest death rate. It wouldn't be unreasonable to suspect that because of how expensive the U.S. health care system is, Americans who do get sick avoid going to the hospital altogether. That is admittedly simplified speculation on my part, but it's a starting point for further investigation.
    - gareim 6y ago
      At a 10x difference, it should clue you in that something is wrong. Choice quotes from a UK Gov page: > A report published by the FSA has found it is not possible to compare foodborne disease rates effectively between countries. > The report concludes that attempting to accurately compare different countries’ foodborne disease rates is an almost impossible task. The only way you could attempt this would be for different countries to have the same type of study with the exact same study specifications, over the same time period. Even then, differences in underlying surveillance data available in each country could cause issues, particularly in terms of determining what proportion of IID cases are due to food. https://www.food.gov.uk/news-alerts/news/report-into-international-foodborne-disease-rates-published https://www.food.gov.uk/news-alerts/news/report-into-interna...
whimsicalism 6y ago
> the SEC is one of the branches of government that I trust almost as much as the FDA Hm. I made this comment elsewhere but: The SEC has big structural problems. Way too close of ties with the people it is supposed to be regulating. Take the example of this SEC investigator [0] whose boss got a call from one of those Wall Street hedge funds under investigation and suddenly he's fired! Mysteriously, that boss gets a job with the same firm a few months later. Oh, the kicker? The person who made that call from the hedge fund? Appointed to be the SEC chair in 2013. [0]: https://en.wikipedia.org/wiki/Gary_J._Aguirre https://en.wikipedia.org/wiki/Gary_J._Aguirre
- NoOneNew 6y ago
  Well, here's my issue with the SEC that I admittedly don't have a good solution. https://www.federalpay.org/employees/securities-and-exchange-commission https://www.federalpay.org/employees/securities-and-exchange... The general purpose of the SEC is to investigate, fine and in general "stop" financial crimes in the financial market. This, in theory, requires said investigators to be smarter than the perpetrators or at least somewhere on par. While these folks are paid really well on average... this isn't "fuck you money" like on Wolf of Wallstreet. Even "poor fuck you money" is better than what they make. While I won't dismiss the need for a lot of attorneys and accountants in their profession, 333 examiners doesn't seem adequate against a $440k average salary industry with 176k employees 2018 numbers (https://www.osc.state.ny.us/sites/default/files/reports/documents/pdf/2018-11/report-6-2019.pdf https://www.osc.state.ny.us/sites/default/files/reports/docu...). Unless there's much more overlap than I'm imagining. I mean seriously, if you're smart enough for the financial industry, you need to have a much higher moral code to take the less than half rate of average salary compared to the people you're investigating. Which I'm not knocking. I always respect people who take a moral high ground stance and try to do some actionable good, especially if it's at a detriment to their own wallet. It's just, expectations need to tempered with their overall capabilities. On top, agreeing with you on structure, what kind of hell do some of these folks experience working in a government environment? How many get salty real fast and get all pissed off from the shit they deal with bureaucratic wise along with shitty pay compared to the industry's employee? There was a line from Burn Notice that I've always attributed to this, "Fighting for the little guy is for suckers". So yea, can we all really trust the SEC? Maybe... but can you really blame them by too much regarding "issues" granted that most of any industry, especially tech & finance, is about jumping to the next better paying job? I mean think of this scenario, "You're going to get fined no matter what happens today. But I can reduce it by half if a moving box full of cash magically appears on my back porch."
eru 6y ago
Are you sure the current FDA is worth your trust? Or are you being cynical? The pre-1962 FDA had perhaps the better regulatory framework: back then new drugs had to show safety, now they have to show safety and efficacy. Off-label prescription show that efficacy requirements are not necessary in practice, and just needlessly delay drugs and make their development more expensive.
- bagacrap 6y ago
  I for one am glad that pharma companies aren't allowed to peddle prescription meds that don't actually work. If there's some other use case for that drug (your "off label" application) then it will pass through the approval process with efficacy proven for that. I think it's more of a dilemma that off label scrips aren't used more often. Since there's zero monetary incentive to prove efficacy for a second application and doctors generally prefer officially sanctioned uses, lots of patients miss out on helpful treatment.
  - eru 6y ago
    You know that there is no approval process for off label prescriptions? Doctors just use their so called clinical judgement. The suggestion would be to go back to pre-1962 regulations, and put normal and off-label prescriptions on the same footing.

gamerDude 6y ago

If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?

deleted 6y ago
[deleted]
Areading314 6y ago
I believe they could still be sued for these damages
nojito 6y ago
SEC can't provide retribution to customers. That's a job for the courts.
- Technically 6y ago
  Courts don't do much good here either. Realistically, the US does not have a way to hold powerful entities to account for every day americans.
- colejohnson66 6y ago
  But who would bring the suit to the courts? Just some random law firm starting a class action? We all know how that turns out (in terms of retribution[a]). There has to be a better way. [a]: Because class actions technically aren’t about retribution, but discouragement
jnmandal 6y ago
The sad truth of this is that this is just three letter agencies doing as three letter agencies does. I don't think anyone at the SEC was looking after consumers here. If they were, they would similarly investigate other brokerages with the same practices (which is many).
- 6y ago

dsbleia 6y ago

Will this kill their public offering?

dj_mc_merlin 6y ago
Definitely not.
jariel 6y ago
More likely to help it, because it clears the cloud of an impending investigation and the outcome is a little blip. Investors like things to be cleared up, even with damages, because the damages can be seen as a limited, tangible thing they can just write down and move past.

jgalt212 6y ago

This is probably why VC's have historically shied away from heavily regulated industries. It's just too easy for " insanely ambitious" founders to run afoul of the rules and laws. Fortunately for AirBnB, these rules and laws weren't enforced all that often.

dimitrios1 6y ago
This is inaccurate. Some of the most successful startups in recent memory made their bankroll by skirting regulations. It eventually catches up to them, but by then they've made a decent sized war chest to comply and plow forward. Eventually the startup just becomes the next established player. Rinse and repeat.
- jnmandal 6y ago
  Yeah I mean, there is practically a cookie cutter framework for building successful startups based on industries with regulations that are protective or restrictive (depending on you look at it) enough to skew markets.
- jgalt212 6y ago
  Please cite some examples from "heavily regulated industries".
  - whimsicalism 6y ago
    Uber is the canonical one.
  - dimitrios1 6y ago
    The one you are literally commenting about. Uber. Medical Software / Device startups. Energy startups. The list is too long. A basic search will yield you bountiful results.
travisoneill1 6y ago
In AirBnB's case were there actually any preexisting rules? It would seem strange to have rules in place governing short term rentals before there was really even a market for that.

gbronner 6y ago

This can and will be fixed by hiring the compliance department from another broker. Etrade just merged with MS, and a lot of the etrade people are in in the SF Bay Area....

bagacrap 6y ago
they have agreed to bring in an "independent third party" although I have no idea how they can really remain independent when they're ultimately collecting a check from RH.
- bun_at_work 6y ago
  They are independent because there exists no preexisting conflict of interest between the third party and RH. That's what independent means in this case.

fortran77 6y ago

Their customer base is still worth a lot--think of all the odd-ball crypto derivatives Robinhood can pitch them. The $65MM may turn out to be a small cost of doing business.

remote_phone 6y ago

I wish the SEC would force companies to plead guilty instead of weasel out and pay a fine without admitting guilt. It doesn’t help anyone. If Robinhood is engaged in fraud or lying to their customers they should be forced to admit guilt and all the consequences from this. All this is is a slap on the wrist and political theater and I’m sick of it. I want some real teeth even if it results in less fine being paid. Or have them pay a crippling fine, one that takes away most of their cash. Something with meaning, not a meaningless fine

donohoe 6y ago

I feel that if a company is paying a fine of 1M or more, someone should also be going to jail - otherwise there is not going to be any meaningful accountability.

bhelkey 6y ago
> Robinhood agreed to pay $65 million to settle the charges. ... Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty. A slight quibble, Robinhood and the SEC settled. There was no fines issued. I do think that the threat of being sent to jail would be a much better deterrent than the threat of losing 2x the money gained by doing something illegal.
tptacek 6y ago
Get that law passed, bearing in mind that half the country is represented by a political party that is opposed in principle to financial regulations of almost any sort.
- idlewords 6y ago
  And the other half by the Republicans!
  - tptacek 6y ago
    I am dead.
nbardy 6y ago
Agreed. Same as 2008 crash. The executives that made these decisions are most likely ending up ahead on their fat salaries. We’ve got to hold decision makers accountable.

ehejsbbejsk 6y ago

I believe this is to punish RH for offering zero commissions. Especially on options. I seriously think what RH offers, for anyone who’s traded options on the retail side, is a game changer.

cj 6y ago
Sometimes what's good for the 1 person isn't good for everyone. For example, if a bank starts giving out 0% interest 100 year mortgages (with some fine print that gives them some obscure revenue source to make it possible for them to make such an appealing offer) the bank should still get in trouble in my opinion if the consumer isn't informed about how they're getting such an amazing deal, because you're removing the consumer's ability to make an informed decision.
- ehejsbbejsk 6y ago
  I know what you want to say but that’s an awfully bad example. I would take out that loan 10 times over.
  - ac29 6y ago
    So would everyone else, and it would massively push up the price of housing. I think that was the point.
  - jellicle 6y ago
    I believe for this example to be correct, the bank would also be hiding in its documentation that you have to pay an annual $100,000 mortgage paperwork fee for this 0% loan.
eru 6y ago
Alas, for most people, especially retail and even more especially options, it's better if they trade less.
- ehejsbbejsk 6y ago

d33lio 6y ago

They deserve every single bit of this. Please use a real reputable broker / platform like Schwab. Sure, they don't have a mobile app - but they also don't sell your trading info to front-runners, actively manipulate the charts they show you to influence your decisions and let their platform crash and just tell you "thats how things go". edit - I didn't realize Youtuber RH fanboys read hacker news...

argonaut 6y ago
Schwab also receives payment for order flow (AKA selling your orders): https://www.schwab.com/legal/order-routing-1 https://www.schwab.com/legal/order-routing-1. In fact, every retail brokerage I'm aware of receives payment for order flow. Schwab also has outages although not as bad as Robinhood was this year.
- d33lio 6y ago
  Sure, but they don't promote buying crypto as an "investment". Tbh, I don't really have the patience to argue over this.
  - renewiltord 6y ago
    Then don't, because clearly you made incorrect claims to start with.
  - vel0city 6y ago
    > An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. https://www.investopedia.com/terms/i/investment.asp https://www.investopedia.com/terms/i/investment.asp Buying Beanie Babies or tulip bulb futures or cryptocurrencies because you expect the value to increase over time is absolutely an "investment". They might be good or bad ideas to invest in, but they're without a doubt an investment.
- 6y ago

deegles 6y ago

What is the purpose of such small fines? Their valuation has gone from 1.3B in 2017 to 10.2B in August 2020 [0]. Only having to pay a $65m fine for that amount of growth sounds like a great deal. /s Obviously it's more relative to their revenues but it still seems like peanuts. [0] https://www.businessofapps.com/data/robinhood-statistics/ https://www.businessofapps.com/data/robinhood-statistics/

andris9 6y ago
I assume they can't pay the fine with their stock
- eru 6y ago
  Indirectly, they can: issue some more stock, and pay the fine with the cash earned.
SpicyLemonZest 6y ago
The purpose of such small fines is to serve as a proportional deterrent to the misconduct they committed. The charge is that Robinhood falsely claimed their prices were lower than the competition; they shouldn't have lied, but that's hardly the crime of the century.

brookshalladay 6y ago

I always wondered about the name 'Robinhood' since it applies taking from the rich and giving to the poor. Maybe it could be renamed to Sheriff of Nottingham.

40four 6y ago
I nominate this for HN joke of the day.
malux85 6y ago
It’s a trap. It implies it, but doesn’t guarantee it. Everyone wants to be that hero in the narrative, and by the time the people figure out they have been shirked (but not directly lied to) your company has been acquired and you’re out with bags of money. Clever, unethical and legal (by the thinnest margin)
mszcz 6y ago
Yeah, it seems it's a recurring theme nowadays with companies - you either die a hero or live long enough to see yourself become the villain. And this time the company is named Robinhood? You really can't make that stuff up.
VRay 6y ago
Well, to be fair, before Robinhood came along it was still pretty standard to pay huge fees AND have your order flow sold. I wish they had been straightforward about what they're doing instead of explicitly lying on their website about where their money comes from, though.
Stupulous 6y ago
I believe the idea is that they are taking access to finance from the rich and giving it to the poor. Commissions are often flat dollar amounts, so the more money you have, the less significant they are. Charging a percentage (which this is effectively doing) benefits small trades and hurts large ones. And I believe they still meet or beat market rates, they just find savings that they don't pass along to the traders. No doubt the Robin Hood of myth turned a profit as well.

sschueller 6y ago

How many people will be going after RH when Telsa stock crashes (to reasonable numbers) and they can't sell as fast as all the front runners?

gigatexal 6y ago

If it’s free you are the product. Why is that so hard for people to grasp?

Wheaties466 6y ago
so now we're victim blaming for robinhood not disclosing where they make money?
- gigatexal 6y ago
  Nobody is the victim here. People got a free service to buy stocks and Robinhood sold that deal flow to bigger investors.
  - nrmitchi 6y ago
    The claim is that they sold that deal flow in a sub-optimal way that is expressly prohibited from them doing, and it led to consumers not getting the price that they, by law, should have been given.
    - gigatexal 6y ago
      If that’s indeed the case then we should throw the book at them. Breaking the law is different than selling a service for free and monetizing your consumers.
      - nrmitchi 6y ago
        > Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934 Oh, don't worry. Robinhood agreed to sign a piece of paper agreeing that it wouldn't break the law any more. And just to be clear, this isn't the first time that Robinhood has blatently broken the existing laws and regulation. The "infinite money" "glitch" is a situation which is straight-up codified to be not allowed (for obvious reasons). They were either incompetent or negligent. They attempted to release a "bank account" product and claimed it would be covered by insurance which it would not be. Again, either incompetence, or negligence.

_cs2017_ 6y ago

ELI5: why exactly did the clients get bad execution? Does sending order flow to trading firms in itself cause unfavorable execution? Or did the trading firms treat order flow from RH differently than from other sources? Or is it something else? And does the fact that RH was receiving large payments for order flow impact the quality of execution?

bagacrap 6y ago
Payment for order flow trade never helps the consumer. RH accepted unusually large amounts of it. They harmed the consumers to the tune of $34m relative to normal practices. They lied about what they were doing.
- Kranar 6y ago
  This is incorrect. The benefit of order flow to the consumer is additional sources of liquidity. If a consumer submits an order to buy 500 shares of AAPL for $100, there may only be 100 shares available on the public market at that price in which case the price of AAPL will increase from $100 to at a minimum $100.01. The way pay for flow works is that firms can execute against that order agreeing to fill any portion of it up to and including the full 500 shares. Furthermore by agreeing to pay for flow, it's a criminal offense for my firm to use that information to front run the order by buying it on the open market without first executing against the client. The allegation made by the SEC against Robinhood is that some kind of indirect front running was performed and perhaps even facilitated by Robinhood. The problem is that the SEC is pretty weak overall, and if their allegation is true then Robinhood should be punished much more severely than this $65M fine given that Robinhood and others likely profited at a minimum some $40M dollars.
  - _cs2017_ 6y ago
    The quality of comments in this thread is atrocious. I wonder what makes so many presumably technically trained people, to make confident claims about topics on which they very clearly have no bloody clue.
- 6y ago

jamesmehaffey 6y ago

It is a shame that these types of tech companies are always churning up such bad publicity... they literally cannot afford to be making these sorts of unforced errors. It just makes it that much more difficult for all the innovative and honest startups who are trying to bring about positive disruption. cutting corners and misleading your customers is not innovation.

_jal 6y ago
It isn't just finance startups. With one exception, every startup I've worked for has done something I considered at least sketchy. The difference is most of them didn't have a federal agency with teeth paying attention. It is, honestly, something I struggle with a bit. I don't like it, but it seems like the state of play is that "a little bit" of cheating is expected, and those who don't are at least operating at a handicap. Exactly how wide that gray area is depends on who is advising you, and sometimes results in shops like early-Uber. One of my least-favorite aspects of SV.
- Bayart 6y ago
  Bryan Cantrill has a talk on YT on ethics in software [1]. And as I remember it the take away is that the way we think about problems isn't very conducive to obeying the law, or being good to people in general. And I've got to say the amount of people I see thinking of regulations, social norms or morals as « cruft » is pretty alarming. [1] https://www.youtube.com/watch?v=0wtvQZijPzg https://www.youtube.com/watch?v=0wtvQZijPzg
- bostik 6y ago
  It's not just startups and/or SV. People generally don't like me bringing this up, but there is a good rule of thumb for everything in life: The only people who play fair are those who don't know how to cheat well enough.
quickthrowman 6y ago
How is a discount brokerage a tech company? They’re .. a brokerage, just like Schwab or E*Trade.

fionic 6y ago

I wish some branch of government would hold Facebook accountable with similar demeanor.

thoughtstheseus 6y ago

Small fines will continue to encourage this behavior. Robinhood was clearly and consistently not acting in the best interests of its clients and misrepresented pricing. Now it’s worth billions.

joshxyz 6y ago
The ol' break the rules and expect the fines approach
jtdev 6y ago
Can we apply this thinking to all of the crooked "financial advisors" and mutual fund managers ripping off working class 401k holders?

jtdev 6y ago

This is comical... As a Robinhood trader, I feel much less "misled" than I did when I was forced to invest in American Funds through an employers 401k plan. The mutual fund managers were scraping piles of money off my and my coworkers retirement nest-eggs and their mutual funds were consistently underperforming the market. The SEC couldn't be bothered to regulate where it matters, they're just gatekeepers and retail investors are not well liked by the power brokers.

IanDrake 6y ago

Two years ago I left IT and started my own wealth management company...and now I'm back. I can tell you, the regulations on the retail side of finance are nonsense and help no one. Like gun control, bad actors don't care about your laws. The only people who are regulated are the honest ones, and the amount of regulation can put them out of business, or even dissuade them from being has honest as they'd like. If RH lied about how they're compensated, then they are certainly guilty, but the harm to consumers is just the tip of the iceberg. Consider how much RH has harmed all the honest financial advisors who had to compete with a "free" service that hides their cost to consumers. If I had lied to one client about how I was compensated, bye bye license.

renewiltord 6y ago
That's usually how regulation works. Regulation is a moat. You want it to be really really harsh and then be one of the first few on the inside. Because by adding a flat startup cost to an industry you make it impenetrable to upstarts. Then you can use a venture-funded company to get inside the moat. But once there are a few inside, the next person investigating will realize that if they also enter the moat everyone will be commodified. They will lose their money too. They'll have to compete and like Thiel says in Zero to One, you don't want competition. Regulation is good for protecting your business and for helping big companies survive upstart disruptors. What happened to you is by design.

xivzgrev 6y ago

This is why fintechs have to have strong legal & compliance teams, especially when you reach a certain size. This reminds me of their debacle where they launched a checking product with a high interest rate and promising it was backed by the federal government...without ever asking the government if that was true.

efficax 6y ago

It's very late stage capitalism for a company named robinhood to actually be stealing from the (relatively) poor to enrich themselves! You love to see it.

notyourday 6y ago

That's just a cost of doing business. Want to fix this as the problem: * bar every officer and every director from serving as an officer or a director * make the fines 30% of revenue

sonotmyname 6y ago

> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. $65M penalty for $35M in misbehavior. That is how you get Wall Street to pay attention. More like this please!

slg 6y ago
Unless the likelihood of getting caught is less than 50% in which case this was still the smart financial move for the company based on expected value. The way to get people to pay attention is to hold people involved in corporate misdeeds personally liable.
- beambot 6y ago
  50% x (-$65M) + 50% x $34M = -$15.5M You'd need better than 50-50 odds. ;)
  - iaw 6y ago
    Math is off it's 0.5 * -65M + 1 * 34M = +1.5M They get the +34M 100% of the time, not 50%, they didn't have to surrender it.
jellicle 6y ago
No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions. So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.
- notfbi 6y ago
  The 34 million calculation is only for "certain" orders. I think this means some trades would be advantageous under the RH model (small trades where a $5 fixed commission would overwhelm any percentage), some trades would be disadvantageous under the RH model (very large value trades), and they only summed the comparative fees on the disadvantageous trades. This might make sense: if users were knowledgeable and had multiple brokers, they may execute at the better trade-specific broker for each trade, so adding up just the potential bads gives some perspective. But on the other hand, it's not a perfect indicator for Robinhood's net gain as its omitting trades where Robinhood's structure leads to lower commission.

miguelmota 6y ago

As long as profits are greater than fines, these penalties aren't enough to incentivize good behavior.

sonotmyname 6y ago
> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. Sooooooo the fine is nearly 2x the cost to consumers due to malfeasance. That should cover your concern here.
- jellicle 6y ago
  No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions. So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.

notional 6y ago

> 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. 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. Reading through the comments had me confused, but it really boils down to a misleading FAQ page. All of which is pretty damn funny because of how innocuous I view FAQ pages to be.

aabhay 6y ago
This is a very tame reading of the mistake. Telling customers that their stock orders would be executed at prices matching other firms, when in fact Robinhood was executing those orders at inferior prices -- that's a big misrepresentation. You're paying extra for something while being told that you're not.
- baby 6y ago
  I don’t get it. If you sell stocks at the market price it wouldn’t be the market price but something cheaper that RB would buy and then sell at the real market price?
  - wocram 6y ago
    Retail orders generally trade with against market makers off-exchange, between the quoted market price. If the quote is Buy @ $1.00 x Sell @ $1.01, a retail order would be able to buy at a price like $1.0099. That $.0001 savings is known as "price improvement". Separately, the market maker pays a negotiated ahead of time rate to Robinhood for sourcing the order, aka "payment for order flow".
  - jellicle 6y ago
    Not Robinhood on the other end of the transaction, but yes. If you and someone else both mashed SELL at the exact same instant, they'd get $48 for their stock and you'd get $47.99 and your confirmation screens would both say "we sold your stock at the highest price we could find". In exchange for sending their customers to a place where they'd only get $47.99 instead of $48, Robinhood received direct cash payments.

allenz 6y ago

To add a bit of context: brokerages like Robinhood send buy/sell orders to national exchanges and to private trading firms e.g. high-frequency traders. Private firms provide price improvement: orders that execute at prices better than the national exchange. All brokerages have a duty of best execution, including a duty of price improvement. Brokerages can also receive payment for order flow from private firms, as long as it does not interfere with best execution. However, "Robinhood explicitly offered to accept less price improvement for its customers... in exchange for receiving a higher payment for order flow," which is illegal. Full order: https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf

vslira 6y ago
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
- sesuximo 6y ago
  More like you want to buy something that would cost 100, and RH got paid 5 to send your order to a trading company, and that trading company executed at 101.
  - aynyc 6y ago
    RH orders aren't LIMIT HELD orders?
  - room500 6y ago
    No. If you had a limit buy, Robinhood would never exceed your limit. Period. That would be highly illegal. This is more like you want to buy something at 100. Robinhood then goes to the market and looks at all the vendors. The vendors are selling at various prices. Robinhood has a relationship with one of the vendors so they went there and that vendor was willing to sell at 98. However, a vendor down the street (that Robinhood doesn't like) would have been willing to sell at 97. None of that is illegal. What the SEC is arguing here is that Robinhood didn't tell the customers this when they advertised "commision-free" trades. In Robinhood's eyes, they didn't charge a commission, so this was accurate. But in the SEC eyes, the customer was paying a "hidden" commission because they would get a slightly worse price than if they went with a different broker. Imagine you are Fidelity... All of a sudden, you have Robinhood advertising "commission-free" and you just lost a good chunk of business from retail traders. You then complain to the SEC because the advertising here is not entirely accurate - the customers might have even gotten a better price with Fidelity - even if you add in the commission. FTA: > The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.

nps1 6y ago

I would say that $65M is a good investment from Robinhood perspective. As it has grown significantly since then due to this. The fact that SEC enforcement is 2 years in a high frequency world is in itself means it is just token enforcement. The trading world we should have enforcements as the trade happens.

pdovy 6y ago

The payment for order flow piece is a little confusing as presented in the press release, but the actual SEC order makes this a little clearer: https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf Basically there are two ways broker-dealers that want to do business with Robinhood or similar firms can provide incentives: 1. Pay the flow provider (i.e., Robinhood) some amount per order/share 2. Provide price improvement over the prevailing market price to the end customer (which the provider can then use to market themselves as providing good execution). Ultimately both of these are coming out of the broker-dealers bottom line, so the unit economics have to work - (1) and (2) have to leave a positive profit margin on average. Typically a firm like RH would be monitoring execution quality and negotiating price improvement requirements with the broker-dealer. This order finds that RH failed to do that, and likely as a result of their demand for high payment for the order flow, (2) was below their peers while they were stating otherwise in their marketing materials.

tptacek 6y ago

They were fined by FINRA last year for best-execution slipups as well: https://www.finra.org/sites/default/files/2019-12/robinhood-awc-121919.pdf https://www.finra.org/sites/default/files/2019-12/robinhood-...

maerF0x0 6y ago

Does all this inferior execution boil down to Market orders? I learned early on (iirc from Jim Cramer!) to use limit orders. There would never be an inferior execution with limit orders, right? EDIT: this comment seems to speak to the topic: https://news.ycombinator.com/item?id=25456763 https://news.ycombinator.com/item?id=25456763 according to ^^ even if you limit buy for $100 they have a duty to get you $99 if it's available.

nrmitchi 6y ago
A limit order just specifies the maximum that you are willing to spend per share. For example, putting in a limit order at $100 for a share of "X", means that you won't pay more than $100. If the best available price for "X" at the time is $98, and Robinhood gives you a share for $99, that is still an inferior execution.

pochamago 6y ago

I confess I don't really understand the controversy here. I thought everyone who cared was already aware of how RH makes its money, and everyone who didn't was still getting a better deal per trade than they would have with traditional brokers. I ended up switching away from RH once my trades for big enough that other brokers were effectively taking less, but I'm still really grateful that I was able to learn the ins and outs of standard speculation with a $500 account

tptacek 6y ago
* Basically all of the brokerages make money this way. * Robinhood took a bigger slice of the pie than the other brokerages did. * Robinhood claimed in marketing materials that they were not taking more of the pie. * Even factoring in the fee savings, Robinhood took so much of the pie that you'd get a better deal at other brokerages. The issue on HN is always going to be a litigation about PFOF itself. But that's not the SEC's complaint here; rather, it's that when you enter into a PFOF rebate deal, you dial in profits for yourself against savings for customers. Everybody does that, but Robinhood both (1) turned the dial way towards themselves and (2) claimed otherwise.
gist 6y ago
The dollar amount that any Robinhood customer lost pales in comparison to the money they can lose when buying stocks in general ie gambling no way around it. The entire industry as some may know is built on 'do your homework' and 'hold long term' is basically a big shared delusion gamble. The majority of people will make money if the market goes up and lose money if the market goes down.

Alupis 6y ago

How is this company still around? How many times have they been in trouble with some government agency, SEC or other? From pretending to be a bank[1], to having a bunch of accounts looted and no ability to stop it[2], now this, and I'm sure others I'm forgetting right now. It seems this company is really not a smart place to park any serious amount of money with. They don't take their responsibilities very seriously; carelessly flaunting the law and financial regulations. [1] https://www.axios.com/robinhoods-new-checking-account-b2b0df32-40c6-4bd1-b336-2408b27f16b0.html https://www.axios.com/robinhoods-new-checking-account-b2b0df... [2] https://www.bloomberg.com/news/articles/2020-10-09/robinhood-users-had-accounts-looted-say-there-s-no-one-to-call https://www.bloomberg.com/news/articles/2020-10-09/robinhood...

goshx 6y ago

What is the best way to migrate away from Robinhood?

arduanika 6y ago
Buy index funds and hold :)

toptick 6y ago

The fact that Robinhood routed to these wholesalers was always easy to see... it’s in their SEC rule 606 reports. This info was buried deep on their site, but you can alway use a search engine to find it. You just had to know where to look. They took payment for order flow (PFOF). So do many of the cheap brokerages on the street. To me, the funny part is that the old school wall st institutions Robinhood is supposedly disrupting do not take payment for order flow. Morgan Stanley and Merrill will not take it. They go for the best execution quality always. Although, I do not agree that this practice is necessarily illegal... there’s a simple argument to make: by taking payment over price improvement the broker is able to provide a lower commission. The all in price could still be better for the customer. Robinhood is not skilled enough to navigate this issue though. From a guy that used to run best ex at a wall st firm...