Robinhood Markets Incorporated is facing a civil fraud investigation over its early failure to fully disclose its practice of selling clients’ orders to high-speed trading firms, according to the Wall Street Journal.
Hello and welcome back to patrick boyle on finance so today’s video is all about robin hood the trading app which is facing a civil fraud investigation from the securities and exchange commission millennial trading app robin hood is facing a civil fraud investigation from the securities and exchange commission for failing to disclose that it was selling clients
Orders to high-speed trading firms according to the wall street journal the investigation revolves around robin hood’s practice of being paid to route customers orders to high frequency trading firms like citadel and two sigma robin hood’s entire business has been built since its inception on selling its customers orders which is known in the business as payment
For order flow to high frequency trading firms these payments account for 70 of robin hood’s 130 million in revenue during the first quarter in the second quarter of this year robin hood’s payment for order flow revenue doubled to 180 million dollars at competing discount brokerages like schwab and e-trade payment for order flow only accounts for around 3 and
17 of revenue respectively robin hood has been growing a lot during the covet lockdown adding three million new accounts in the first four months of 2020 the press has reported that many sports bettors who have no games to bet on right now have taken to trading stocks payment for order flow is a controversial practice that’s been referred to as a kickback by sam
It was pioneered by bernie madoff yes that bernie madoff he described it as a way for market makers to outsource the task of finding orders to fulfill and he compared it to retail arrangements in which a supplier pays for the rack on which its products are displayed at a store although the practice was uninvolved in madoff’s later fraud scheme it has long been
Controversial the sec does permit this practice because they feel that it sustained competitors to the new york stock exchange and reduces the likelihood that the new york stock exchange specialists would have monopoly power the uk’s financial authority banned the practice in 2012 and according to barron’s trades executed at the best quoted prices jumped from 65
To more than 90 percent between 2010 and 2014. high frequency traders are not charities the only reason that a high frequency trading firm would pay robinhood between tens to hundreds of millions of dollars for order flow is that they feel they can exploit the retail customers for far more than they pay robinhood it’s worth noting that under sec rules traders are
Not obliged to get the best price for clients they’re obliged to get the best execution which can include other factors like the speed of the trade according to the wall street journal the investigation is at an advanced stage and the company could have to pay a fine of over 10 million dollars if it agrees to settle a deal apparently is unlikely to be announced
This month and the two sides have not formally negotiated a proposed fine a robin hood spokeswoman declined to comment on the investigation or any talks with regulators to the wall street journal but said that robin hood strives to maintain constructive relationships with our regulators and cooperates fully with them so is this a terrible thing should you avoid
Trading apps like robin hood well in my opinion there’s nothing too shocking going on here most new economy firms have a business model where they offer you something that appears to be for free but this is just because they have a different way of monetizing whatever it is that you’re doing social networks like twitter and facebook are free but then they make
Money by selling user data to advertisers what robinhood is in trouble for is a disclosure which based on the news it would appear that they have since remedied overall it’s kind of cheaper to trade stocks today than it was at any point in history in the first day trading boom of the late 1990s when discount brokers first appeared they were selling order flow to
Bernie madoff and charging commissions of between 12 and 15 per trade today they’re getting paid far less for selling the order flow and that’s largely because of decimalization basically the market makers are less profitable or the high frequency trading firms that are stepping in are not making as much money as as the market makers were in the 1990s and thus
They’re paying less and they are not charging a commission in the 1980s retail trading commissions were as high as 5 robin hood is not a bad company that’s ripping off their customers they’re a new economy company that has found a different way to generate revenue there are issues with what high frequency traders do with the order flow but these are also being
Cleaned up by the regulators and actually it’s a lot better today than it was five years ago it’s not obvious to me that any of these abuses by high frequency traders or by brokers are any worse than what floor traders and specialists used to do when i started out trading in the market if you want to learn more about high frequency trading i’ll put a couple of
Book recommendations in the description of the video below i guess the real takeaway from this video is just that nothing is for free and you shouldn’t be too surprised or too offended by this robin hood is a company that’s in business in order to make a profit and they’re making a profit by selling this order flow to high frequency traders who possibly profit
From it so you’re not getting to trade for free and you should take that into account when you are trading a lot of people think that because they’re not paying a commission they’re trading for free and can trade as much as they want to that’s not the case and i explained that i think it two videos ago when i talked about bid offer spreads or bid ask spreads
And how traders end up uh you know running up uh transaction costs just because of that i’ll leave you now with a clip of former sec chairman harvey pitt giving his thoughts to cnbc on robin hood and payment for order flow don’t forget to like and subscribe see you later there isn’t necessarily any detriment to investors by having the sale of water flow the
Investors may still be getting a better price than they otherwise would be able to get but what you do have is the potential for conflicts and it’s important for investors to know what’s going to happen with their information and their orders part of the difficulty with robin hood is we’re dealing with a whole generation of millennials who are not used to trading
In the markets and therefore they may not understand what the consequences are of using what appears to be a completely costless execution service stuart can i see you in my office please that kid is safe and squeaky very sick get in here sure thing mr p stuart i just opened my ameritrade account let’s light this candle let’s go to ameritrade.com it’s easier than
Falling in love what do you feel like buying today mr p kmart so research it all this stuff is provided for you free of charge no cost yeah that’s synonymous with free looks like a good stock let’s buy let’s buy a hundred shares all right click it in there okay how about hundred one hundred stories feel the excitement you’re about to buy a stock okay oh fabulous
I’m thrilled what did that cost me eight dollars my man mike broker charges me two hundred dollars riding the wave of the future my man i gotta get this soda having a party on saturday night if you really want to go i’m going to try and get there thank you for waiting thank you rocco all right stuart you
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Robinhood is Being Investigated for Fraud by the SEC. Here's Why. By Patrick Boyle
