Robinhood Zero-Fee Trading App Makes Millions By Selling User Trading Data To Wall Street Traders
Reports reveal that Robinhood App is actively used in a scheme that involves the sale of their user's data to high-frequency trading (HFT) brokers on Wall Street.
New reports reveal that Robinhood, the feeless broker, which recently introduced cryptocurrency trading, makes its money by selling user trading data to Wall Street traders for a pretty penny, which explains how the company hasn’t gone bankrupt.
Robinhood burst onto the brokerage scene with a promise to revolutionize the trading industry and make it easy, less costly, and more secure for new investors. While it has done so and earned the trust of millions of users, everything could end up being a sham.
Heavy allegations levied against Robinhood
It appears the U.S-based mobile brokerage firm has been accused of profiting millions of dollars by selling users’ data. The zero-fee trading site that ostensibly promises to help the average person could actually be stealing from them.
Reports allege that Robinhood App is actively used in a scheme that involves the sale of their user’s data to high-frequency trading (HFT) brokers on Wall Street.
The disturbing development first surfaced after the company behind the app filed its Q2 financial statement with the Securities and Exchanges Commission (SEC).
According to Logan Kane, a writer with the North of Sunset Publishing, Robinhood exploits Millenials to the benefit of HFT firms.
Some brokerage firms receive payments for availing customer’s order flow to HFT firms, a practice that has split the industry. For instance, both Vanguard and Interactive Brokers refuse to sell such data. The latter gives the user the option of routing their orders to the exchange of their choice.
But Robinhood, among many others, opts to route this information in exchange for a payment. While this is common among brokerage firms, further calculations of exactly how much the company receives paints a worrying picture.
“… They appear to be selling their customers’ orders for over ten times as much as other brokers who engage in the practice.”
Simply put, not only is this conflict of interest but an act of deception that breaches the confidentiality four million users have had in the firm.
Millennials most affected demographic
Millennials represent a considerable chunk of the population that is actively investing in stock and cryptocurrency. Apps like Robinhood have attracted them with zero-commission trading, the promise of cutting edge technology and security, and “Free options.”
Kane explains that brokerage firms that sell order flow must disclose these transactions to the SEC.
There is a substantial difference between the disclosures Robinhood files with the SEC and those from other discount brokers, suggesting that there is something nefarious going on at the firm.
From its SEC rule 206 disclosures, the firm received payments for directing equity order flow to HFT firms including Apex Clearing Corporation, Citadel Securities, LLC; Two Sigma Securities, LLC; Wolverine Securities, LLC, and Virtu Financial Inc.
A comparison between Robinhood and two of the largest brokerage firms may help shine a light on these allegations.
E*TRADE has an AUM of $392.8 billion, and its latest SEC rule 606 disclosures show that it generates about $47 million every quarter from the sale of order flow to HFTs.
Another firm, TD Ameritrade, puts its AUM at close to $1.2 trillion. TD Ameritrade’s rule 606 disclosure shows that it earned nearly $119 million in the previous quarter from the sale of order flows.
Both TD Ameritrade and E*TRADE payments received for order flow amount to about one-tenth of a penny for every share.
Contrast that with Robinhood which accepts payments “per dollar” of every trade value. What this means is that, though the Robinhood’s figures appear smaller than the other firms, they are more significant.
Connecting the dots
Seem as this case is little more than conjecture and conspiracy theories, but Kane wonders why the high-frequency trading firms are ready to pay as much as ten times more to Robinhood than they do to other brokerage firms.
He also wonders why the platform doesn’t report what they earn per share just like how other firms including E*TRADE, TD Ameritrade, and Charles Schwab do. Is there a motive behind the need to make the numbers appear smaller?
No allegations have been independently verified, but the lack of transparency means questions remain and experts doubt that Robinhood can survive without sufficiently alleviating these concerns.
The math does not add up for Robinhood, and hiding behind the “per dollar” reporting shows it may receive much more money from HFTs than other firms.
While it remains a popular app, such alarms raise questions about the genuineness and execution of the fee-free product.