Is Robinhood stealing from retail to give to Ken Griffin? This expose from Investing.com seems to suggest it is.
Robinhood Markets (HOOD) operates a commission-free trading app which became wildly popular in March 2020 with retail traders. Aside from the fact that HOOD is symbolic of the biggest stock bubble in history, the corporate suite is riddled with fraud and corruption.
But this trading service is not exactly free. The bulk of Robinhood’s revenues comes from routing its order flow to third-party trading firms rather than the stock exchanges. This increases the execution cost, unknowingly, for Robinhood’s retail, stool-pigeon accounts. In Q2 HOOD routed 34% of its order flow to Citadel (hedge fund and brokerage) and 21% to Susquehanna (options order flow).
Robinhood Stealing using PFOF from Citadel?
It is alleged that Citadel and Susquehanna “front run” the order flow by taking positions, with buy orders for instance, in the stock/options being routed to each firm before executing the Robinhood orders. These orders drive up the price of stocks/call options like AMC Entertainment Holdings and GameStop.
Citadel or Susquehanna then unload their front-running position for a profit that exceeds what was paid for the order flow. The mechanics of this may be akin to “scaling fish” for profits but aggregated over $10’s of billions of orders it’s huge, free money for Citadel and Susquehanna. It’s also easy to hide and hard for regulators to prove (if they bothered trying). But this is one of the ways in which Wall Street skims money from investors.
Robinhood is not the only brokerage that does this but HOOD has built its business model on order flow payments, as 80% of HOOD’s revenues is derived from order flow revenues. It was announced late September by the SEC Chairman that banning payments for order flow was “on the table.” and this could effectively destroy Robinhood's current business model.
In June 2020, Robinhood was fined $57 million by FINRA and ordered to pay $13 million in restitution to clients affected by app outages and misleading communications in March 2020. It was the largest penalty in FINRA's history.
Then, In December 2020, the SEC brought charges against Robinhood for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing orders to them and with failing to satisfy its duty to seek the best reasonable available terms to execute customer orders. The company settled the charges by paying a $65 million fine.
It doesn't end there...the previous day, the Massachusetts securities regulatory agency brought an enforcement action against Robinhood for several regulatory violations, including aggressive tactics to attract new, often inexperienced investors and breach of the fiduciary conduct.
And there’s more. a few weeks ago, it was revealed that the SEC was looking into whether or not Robinhood's President/COO, James Swartout violated numerous securities laws by selling out his position in AMC shares just ahead of HOOD placing a restriction on the stock's trading, and evidence entered into a recent court case seems to provide the smoking gun proof of this.
The full article on Investing.com can be found here.
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