Robinhood Markets Inc, the US retail broker that made a business model out of payment-for-order-flow (PFOF) -based zero commission trading, has seen two of its business units slapped with $45 million in penalties for operational failings by the Securities & Exchange Commission, some four years after being fined $135 million by the SEC and FINRA.
Robinhood Securities LLC and Robinhood Financial LLC, agreed to pay a combined US$45 million in penalties following regulatory violations, according to the SEC. The charges stem from extensive failures across multiple regulatory domains, including inadequate reporting, cybersecurity vulnerabilities, and mishandling of customer information.
Beloved of retail customers in the US for offering the ability to trade equities, options and cryptocurrencies via a smartphone app without commissions, Robinhood is increasingly a cash cow for market maker firms, which pay for the firm’s retail order flows. Of Robinhood’s $975 million of transaction-based revenues for the first nine quarters of 2024, 14% or $136 million, was paid for by Citadel Securities, with other unnamed market makers paying for another 37% of the total, according to Robinhood filings.
In exchange, Citadel Securities and the other market makers have access to equity volumes running at $137 billion per month and options volumes of 150 million contracts per month according to Robinhood, contributing to their own trading revenues. This monthly volume is high compared to Robinhood’s $106 billion assets under custody, indicative of the rapid trading frequency that is characteristic of the firm’s consumer base.
In the past, this was viewed as exploitative by regulators. In its December 2020 £65 million settlement with Robinhood, the SEC said that between 2018 and 2019, the firm “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.”
In June 2021, the US industry self-regulatory organisation FINRA fined Robinhood $70 million, finding that the firm was responsible for ‘systemic supervisory failures and significant harm suffered by millions of customers’, including a suicide.
Some of the FINRA charges of poor record-keeping are echoed in the latest SEC settlement. The SEC identified over ten separate breaches of securities law provisions spanning from trading activity reporting to safeguarding customer communications. Violations included Robinhood’s failure to submit timely suspicious activity reports between 2020 and 2022 and inadequate protection against identity theft from 2019 through 2022. A cybersecurity lapse in 2021 resulted in unauthorised access to customer data, affecting millions.
Robinhood Securities was found in breach of Regulation SHO, governing short-selling practices, between 2019 and 2023. Inadequate compliance with recordkeeping and reporting standards persisted for over five years, compounded by failures in maintaining critical brokerage data. Both firms conceded to certain findings and agreed to conduct internal audits and address deficiencies.
Sanjay Wadhwa, acting director of the SEC’s division of enforcement, emphasised the gravity of the infractions: “Ensuring broker-dealers adhere to legal obligations is critical to the integrity of our markets and investor protection.”
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