A recent SEC filing indicates that zero-fee trading app Robinhood is making millions of dollars by selling customer data to high-frequency-trading (HFT) firms. Recent developments are adding to the controversy surrounding the lack of transparency in Robinhood’s business model.
After opening in 2013, Robinhood has grown to become a nearly $6 billion company by attracting investors with their zero-commission fee trading options. The exchange platform has become most popular with millennials who have opted to use Robinhood as a means of going against the grain of using traditional financial platforms. Robinhood’s support among young people reached an apex this year when it began to offer zero-fee trading for top-listed cryptocurrencies.
The company claims to rely on margin lending and interest accrued from customer account balances as its primary sources of revenue. However, recent data published by the US Securities and Exchange commission is starting to shed light on what appears to be an unethical business model driving Robinhood’s success.
The SEC filing suggests that Robinhood may be relying more heavily on selling user financial data than the company would like to admit. In fact, Robinhood appears to be selling users’ order details at over 10 times the rate other brokerage firms typically charge. While selling user data is in itself a questionable practice, there is now growing concern that Robinhood is not fully disclosing the size and scope of its customer data operations.
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Experts at Seeking Alpha suggest that those interested in long-term investing would be better served to do business with more trusted financial firms like Vanguard, known to not engage in the practice of selling customers’ financial data.
“Not only does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers’ orders for over ten times as much as other brokers who engage in the practice,” writes Seeking Alpha. “It’s a conflict of interest and is bad for you as a customer.”
The report continues,
“Let’s do some quick math. Assume the average stock traded has a share price of $50. It takes 20,000 shares traded at $50 for $1,000,000 in volume, for which E*TRADE makes $22 per $1,000,000 traded, which sounds like a small number until you realize they cleared $47,000,000 last quarter from this. But off an identical $1,000,000 in volume, Robinhood gets paid $260 from the same HFT firms. If Robinhood did as much trade volume as E*TRADE, they would theoretically be making close to $500 million per quarter in payments from HFT firms.”
What’s additionally concerning is that Robinhood has in the past been linked to several other companies that have come under investigation or in some cases been fined by the SEC for illegal trading. Beginning in 2014, hedge fund firm Two Sigma Investments, a Robinhood-partnered company, was subpoenaed by the SEC regarding a survey program intended to garner information about companies’ stock analysts. Then in January of 2017, Citadel Securities LLC, one of Robinhood’s clients, was fined $22 million by the SEC for misleading clients about pricing trades. Finally, in October of 2017, Robinhood client Wolverine Securities was fined $1 million by the SEC for insider trading.
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