Robinhood, a U.S.-based zero-fee trading platform dealing in both conventional and digital assets, found itself mired in an ugly controversy last week after a report surfaced alleging the company of secretly selling user-data to third-parties. The company has since issued a statement denying the charge, but the allegations labeled against the company do, in fact, deserve a closer look.
Is Robinhood Secretly Selling User Data to Make Millions?
The controversy broke shortly after Robinhood published their Q2 2018 financial report in accordance with the Securities and Exchanges Commission (SEC) Rule 606. According to the allegations, Robinhood sells order flows from its customers to high-frequency trading (HFT) firms without ever having disclosed the practice.
The company, founded with the promise to provide traders with a free and fair alternative trading platform, currently boasts more than four million customers, a big chunk of which is millennials.
On the surface, it might appear as though because Robinhood offers zero-cost trading to its ever-expanding user base; the company finds it necessary to sell order flows to widen its revenue stream. However, if the allegations against the company are true, the truth is a little more complicated than that.
For starters, Robinhood is not the sole platform to be engaged in such activities. Many of its competitors also sell order flows to HFT firms, although these transactions make only a small percentage of their revenue. But according to Logan Kane of the North of Sunset Publishing, Robinhood receives at least 10x more as compared to what other trading firms receive in exchange for order flows.
Kane states in his report:
“Robinhood not only engages in selling customer orders but seems to be making far more than their competitors from it. Among brokers that receive payment for order flow, it’s typically a small percentage of their revenue but a big chunk of change nonetheless. Robinhood appears to be operating differently […..]”
Kane also points out that some of the HFT firms Robinhood deals with “are certainly not saints.” He cites the examples of firms such as Citadel, Two Sigma, and Wolverine Securities and how they were caught and penalized by regulatory bodies for their involvement in serious business malpractices. Because Robinhood seems to deal with these companies regularly, it should make a more concentrated effort to shed light into its somewhat-opaque business model, Kane adds.
Robinhood Denies Charges
Expectedly, Robinhood didn’t take the allegations lying down. Fearing an inevitable backlash, the company’s Head of Communications, Jack Randall, took to Twitter to issue a statement on behalf of the trading platform.
Randall stated that Robinhood, just like other licensed brokerages, is legally required by the Federal Law to execute customer orders at optimal prices across all national and regional stock exchanges.
Randall also stated that most publications that covered the controversy didn’t update their articles even after Robinhood issued a clarification. He didn’t miss out on the opportunity to take a dig at those publications:
“ […] Facts, nuance, and following regulation aren’t always interesting to cover, unfortunately.”
Here’s an excerpt from the company’s official statement denying the charges of secretly selling customer information:
“Robinhood algorithmically routes orders to a variety of different execution venues based on which is most likely to provide the greatest execution quality and price improvement on that order in addition to the NBBO. No other factors impact where customer orders are routed.”
The company categorically stated that it doesn’t sell customer information and neither does it intend to do so in the future.
Robinhood officially entered the cryptocurrency market earlier in January 2018 by announcing a waitlist for commission-free crypto trading. The company initially offered Bitcoin, Ethereum, Ripple, along with 13 other cryptocurrencies.