Robinhood’s Unfinished Business – The New York Times
Although the class action lawsuit names many other financial firms, such as Citadel Securities, Charles Schwab, Melvin Capital Management and SoFi Securities, Robinhood is the main antagonist. He is a defendant in nearly every dozen initial actions, faces almost every claim, and appears on almost every page of the filed documents. The complaint qualifies Robinhood as “a real amateur among institutional brokers”.
Daily business briefing
Investors participating in the class action claim that Robinhood’s business model has an inherent conflict of interest. The company generates around 80% of its turnover payment for order flow, which allows it to offer commission-free trades to users. In this arrangement, the broker sells client orders to market making firms (primarily Citadel Securities in the case of Robinhood) who execute the trades. Robinhood takes more profit from this practice than other brokers because its traders are more active.
Critics of payment for order flow, which include some lawmakers and regulators, say it presents a conflict for brokers who are paid by market makers but have a fiduciary duty to clients. And because brokers make more money if clients trade more, the incentive is to “gamify” the trade, which could be against the interests of investors. (In March, Robinhood removed the digital confetti that celebrated the exchanges in the app.)
There is “no doubt” that the decision to limit trading during the January chaos hurt retail traders and cast doubt on Robinhood’s claims to level the playing field for the small investor against large institutions, a. said Marc Steinberg of Southern Methodist University Law School, author of “Rethinking Securities Law”. “The question is to what extent are we going to hold the parties to account. “
These types of lawsuits are an important enforcement mechanism, forcing companies to be more transparent, Steinberg said. The class action lawsuit will take at least 18 months to resolve if it goes to trial, said Maurice Pessah, one of the plaintiffs’ lead lawyers. Robinhood told the court he would seek dismissal.
The plaintiffs have not yet determined how much they will claim in damages if they are successful. Either way, Robinhood has a habit of paying up and moving on.
In July, it was hit by the biggest penalty ever imposed by the Financial Industry Regulatory Authority, $ 70 million, for service outages and deceiving customers. Late last year, the Securities and Exchange Commission fined the company $ 65 million for its failure to disclose “true costs” to customers. The SEC promised a report on the January trading frenzy this summer and warned that changes in how brokerage apps work could follow.
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