Robinhood Hit by Record Fine – Will Clients Switch to Other Brokers?

US broker Robinhood often touted as the platform which “democratised” trading, has been hit by record fines from US regulators. The massive total bill of $70m and the conclusion that the broker’s practises led to “significant harm suffered by millions of customers” has led to a serious re-think of the broker’s image as a “people’s champion”. It also lifts the lid on how different brokers make their money and if that means investors can get a better deal elsewhere. The super-easy sign-up process pioneered by Robinhood could come back to bite them, as rival brokers have also made new client onboarding a painless procedure that takes only minutes to complete. Are the fines and the investigation results going to act as a catalyst, and will this inspire account holders to consider moving to other platforms?

Robinhood – What Went Wrong?

Things went badly wrong at Robinhood, and the firm’s hope that the fines would be in the region of $26.6m suggest it also misread the room on a grand scale.

The total bill for Robinhood has ended up in the region of $70m, the penalties relating to systemwide outages and misleading communication and trading practices. The US authority responsible for administering the punishment, FINRA (Financial Industry Regulatory Authority), has taken a hard stance on the matter. Some Robinhood clients may well do the same and consider leaving the platform. Any trader exodus would come down to the outages rather than the mis-selling, not least because they occurred at the worst possible time, March 2020, when the financial markets were in meltdown. Not being able to access your account and trade during times of market volatility can be incredibly costly, the equivalent of a gun jamming, and is not something anyone would want to experience more than once.

Source: NBC

Why Isn’t Robinhood Available in the UK?

The investigation has also acted as a reminder of some of the other practices Robinhood engages in. The PFOF (Payment for Order Flow) model it follows is why Robinhood isn’t available in the UK. The FCA, the national regulator, takes a dim view of the broker receiving a kickback from the different off-exchange markets to which it sends client orders. The ‘behind the scenes’ practices, the regulator says, could lead to a conflict of interest where Robinhood directs trades to the source of highest revenue rather than the best prices for clients.

What Next for Retail Traders and What Next for the Robinhood IPO?

Retail traders, 13m of whom use Robinhood, have been left wondering what the massive fines mean for them and asking if their broker is really on their side. It takes minutes to set up an account with a new broker, so Robinhood will be rightly concerned that its customer numbers will dwindle. The IPO pencilled in for July might suffer as a result. If you’re looking to trade the proposed listing, you can do so today on the grey market in Robinhood shares offered by brokers such as IG.

If you want to know more about this topic or have been scammed by a fraudulent broker, please contact us at [email protected]

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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