Robinhood has been through a series of troubles, including user suicides, hacking incidents, and now faces a $65 million fine.

The U.S. Securities and Exchange Commission (SEC) launched a civil fraud investigation against the zero-commission investment platform Robinhood in September, accusing the platform of making profits by selling user orders to high-frequency trading firms. Robinhood has now agreed to pay $65 million to settle the case with the SEC.

Autumn of 2020: A Year of Turmoil

This year, amidst the impact of the pandemic leading to the Federal Reserve's unlimited printing of money to support the market, hot money flowed in all directions, with investors flocking into the U.S. stock market. The S&P 500 and Dow Jones indices recently hit historic highs. However, the popular retail investor platform, Robinhood, has had a tumultuous year.

The platform has come under scrutiny this year for making high-risk products easily accessible to investors. In June, an American teenager, not familiar with high-risk financial products, incurred massive losses trading options and tragically could not bear the consequences.

Nevertheless, Robinhood continues to prepare for its IPO debut. By July of this year, its total valuation had reached $8.6 billion. However, due to the impact of the COVID-19 virus, the IPO has been postponed to 2021 with no confirmed date as of yet.

Moreover, in early October, Robinhood fell victim to a hacking attack. According to previous reports, around 2,000 users were affected by the breach, leading to liquidation and withdrawal of investors' holdings and cryptocurrency positions. The platform's official customer service response to this incident was notably slow.

Accused of Profiting $271 Million by Selling User Orders

In fact, as early as 2018, Robinhood, under the guise of commission-free trading, was reported to have profited from selling user orders. According to the SEC document, selling orders is not illegal but requires transparency. However, Robinhood has consistently refused to cooperate. The SEC document states:

This behavior allows institutional investors to have better prices to enter and exit positions, as they often have more information than retail investors. Purchasing user order data enables them to measure various opportunities and trade against retail investors who have an information disadvantage.

In simple terms, when a user places an order on Robinhood, the platform sends the order to various market makers. There is often room for profit between the prices offered by market makers and user orders, allowing Robinhood to profit even with zero commission fees.

It was not until October 2018 that Robinhood disclosed on its website that the company profits from selling user orders. Co-founder Vladimir Tenev stated in a announcement:

This revenue allows us to cover operational costs and continue to provide commission-free trading.

In September, the SEC formally launched a civil fraud investigation, alleging that Robinhood did not transparently disclose details of its dealings with high-frequency trading firms and did not ensure that user orders received the best prices between October 2016 and November 2017.

When the SEC brought charges, it was estimated that Robinhood might face a $10 million fine. Ultimately, Robinhood agreed to pay $65 million.

However, according to a report by the Wall Street Journal, Robinhood may not be out of legal trouble yet. The Massachusetts securities regulator has filed another complaint against Robinhood, stating that the platform exposes investors to unnecessary trading risks and is described as a trading game where retail investors may not win.