The low-cost Robinhood investing app popular with millennials makes up for the lost profits of commission-free trades by selling users’ data to other financial companies.
What’s the Logic of Robbing Peter to Pay Paul?
A Second Quarter SEC filing shows that Robinhood Financial (Robinhood) is actually making millions of dollars from selling users’ data to high-frequency trading (HFT) firms. Recall, this is the same company that espouses values of ethical trading practices that benefit the common man instead of fleecing customers to provide a quick buck for Wall Street traders.
A quick peek at Robinhood’s website presents browsers with feel-good phrases like, “We believe that the financial system should work for the rest of us, not just the wealthy.” Or, “We’ve cut the fat that makes other brokerages costly, like manual account management and hundreds of storefront locations, so we can offer zero commission trading.”
While it should come as no surprise that an investment company would distribute information related to customer demographics and purchasing preferences, the company frequently touts its zero-commision trading options and markets itself as going against the grain of typical Wall Street brokerages. Turns out, Robinhood actually sells users’ order details at 10 times the rate of what other financial companies charge HFT firms. Meanwhile, competitors like Vanguard and Interactive Brokers (IBKR) do not sell users’ data and IBKR even allows customers to place their orders through a variety of exchanges.
Robinhood does mention that it generates profits by margin lending and interest generated from the balances of customer accounts — but the most recently published SEC filing shows that the company could be heavily reliant on the revenue generated from the sale of user data.
There are Deeper Concerns
A report from Seeking Alpha suggests that Robinhood’s sale of customer data is “a conflict of interest and is bad for you as a customer.” The report goes on to detail a hypothetical calculation of how Robinhood could “theoretically” rake in $500 million per quarter from HFT firms if their volume was as high as E*Trade.
The sale of user data by Robinhood should be cause for concern for current and future customers as a handful of the companies that acquire financial data from Robinhood have been investigated and fined by the SEC for illegal trading. In fact, in January of 2017, Citadel Securities LLC was fined $22 million for publishing “misleading statements” about the way in which it priced trades.
Are you okay with exchanging your personal data in exchange for commission free trades? Share your thoughts in the comments below!
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