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Last updated on August 28th, 2022 at 09:11 am
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Robinhood suffered a lot of bad PR after restricting trading on GameStop on their platform, depriving millions of users of the option to buy shares and earn money from this volatile stock. Many also started to doubt Robinhood as a fee-free stock broker app and wonder how the platform earns money if it doesn’t charge customers any trading fees.
It’s not surprising either for one to wonder if the company sells user’s data — does it?
Robinhood sells customer transaction data to third-party companies that use the information to execute the trades. This practice is called payment for order flow, and it’s not uncommon among many stock exchange platforms.
Robinhood does not sell other user info such as address, email address, etc. The only information that they sell is about your trades which allows another company to frontrun the trade and make a few pennies on the transaction.
Keep reading as I will discuss the safety of Robinhood for trading. I’ll also describe two significant situations that make Robinhood not trustworthy in many people’s eyes and how their lack of transparency has lost them many customers.
Robinhood Sells Customer Transaction Data
Robinhood ensures that passwords and sensitive information are hidden and encrypted. Interestingly, Robinhood’s lack of transparency towards its customers and clients has caused many of them to leave the app behind and invest somewhere else.
This video explains how Robinhood makes money off of selling the stock trading data to market makers:
Robinhood is a part of SIPC, a non-profit corporation that protects investor brokerage firms if something goes wrong. SIPC can fund up to $500,000 in securities and up to $250,000 in cash, giving Robinhood’s customers a sort of safety net in the event Robinhood is hacked.
The fact that Robinhood is a part of SIPC makes it a bit more trustworthy because users can protect themselves in case Robinhood goes bankrupt or is hacked.
However, the two following charges against this firm can be used to prove that Robinhood isn’t the easiest to trust. Two significant issues discredit Robinhood among their users: SEC charge against Robinhood and FINRA fines.
SEC Issued Charges Against Robinhood
Robinhood came under investigation in 2020 by The Securities and Exchange Commission. This eventually causing the company to pay $65 million to settle the charges. Robinhood was accused of not disclosing the receipts from selling the data to market makers.
The investigation details show that Robinhood shared false information about the costs of trading firms, consecutively benefiting more prominent players in the equation — institutional investors and hedge funds.
The chief legal officer Dan Gallagher said Robinhood is transparent with their decisions and is doing everything in their power to better their best execution solutions to benefit their customers.
FINRA Ordered Financial Penalties Against Robinhood
The shocking outcome of unsupervised technical difficulties is one of the many reasons why FINRA is charging Robinhood. This led to misleading thousands of customers by not caring for their infrastructure and not investing enough money in proper customer care.
System failures and the lack of proper customer service caused the misinformations causing severe mental health issues for many even resulting in the suicide of one customer.
FINRA ordered a $70 million fine from Robinhood due to issues caused by their lack of supervision and business transparency, which makes it the most significant penalty in FINRA history.
Is Robinhood Misleading?
Robinhood has been considered misleading in the past because of their IT system issues that showed incorrect account balances to their customers, making them unable to make trades or allowing them to make a trade they are not qualified for.
The FINRA fine explains that issues with their systems caused many written complaints from the customers that weren’t reported to the FINRA, which casts a shadow over the app and raises many questions.
According to the New York Times, Robinhood customers were investing in some of the riskiest products, and at their core, Robinhood wanted to incentivize a large number of trades as they make money by selling trade data
The more trades a customer makes, the better for Robinhood.
The fast pace of the trades happening indicates that rather than investing, customers were almost gambling, or at least it seemed like it.
The Robinhood interface, which looks playful and game-like, made people claim that this trading stock app is misleading because celebratory confetti happens every time a trade occurs.
Keeping in mind that Robinhood was among the first stock trading platforms that offered $0 commission participation in stock trades, they gained many customers over the years. Anyone can sign up and start investing regardless of their previous experience.
Many of those customers, 80% of them to be exact, are Millenials making their first investments through this app. Los Angeles Times explains that the app resembles a video game, making it alluring to the young investors who want to try out their skills and make money from this volatile investing app.
With all of this in mind, the app needs to be highly open to changing its MO. They need to be of service to young investors to protect their financial and mental health.
Robinhood needs to change to a more educational approach and invest in high-quality customer service to help its youngest members.
Should You Use Robinhood?
Robinhoods’ questionable approach to information transparency partially ruined the idea of the stock market becoming more approachable to ordinary people. But don’t let this stop you from trying out the platform.
There are still a few reasons to use Robinhood for your investing or trading.
You may consider using Robinhood if you’re new to trading or investing. Robinhood is free of charge, and it even allows you to buy parts of a share if you don’t have the money to buy a full one.
The flexibility and lack of account minimum requirements are additional good reasons to try Robinhood.
Alternatively, you can always opt for other stock investing and trading apps other than Robinhood. But bear in mind that they may sell your data to third parties as well as it’s a pretty common practice across the industry.
The idea to democratize the stock exchange and get more non-professional stock investors to join the market sounded like utopia, and the Robinhood saga made it clear that it is.
The app itself can be a great indicator of how the stock market is moving. Using it to your benefit as a learning tool can be an excellent way to go but have in mind to be careful and informed at all times.
If possible, consult a financial advisor before making any large investments.