“There ain’t no such thing as a free lunch” is a common phrase in Economics to describe which was popularized by the free-market economist Milton Friedman, using it as the title of a 1975 book. Well, Robinhood’s zero-fee cryptocurrency trading app is so successfully bringing this phrase to the crypto industry. The recent SEC filings of Robinhood indicate that Robinhood is selling its users’ data to earn millions of dollars.
Robinhood sells data for 10x the amount one would normally pay
Robinhood’s founders had envisioned to “disrupt” the traditional brokerage industry by providing zero-commission trading of fiat-based exchange-traded-funds (ETFs) and digital currencies. However, that vision seems to be partly true. The closer examination of its business operations by the US Securities and Exchange Commission (SEC) has revealed that the California-based broker is selling its customers’ orders at huge premiums, which if equated comes over 10 times what other brokerage firms charge.
Selling user data, which is part of Robinhood’s business model, is a highly controversial practice. A lot of prominent names in the industry have taken on Twitter to criticize it
Mick Hagen, CEO of Mainframe, said “ As always, when you aren’t paying for the product, you ARE the product”
Josh Brown, CEO of Ritholtz Wealth Management, said
This data as coming out as SEC requires that all brokerage firms who sell their customers’ order flow to disclose who they sell it to and how much they are paid for it. This also signifies why cryptocurrencies need to have a regulatory approval.
Your data in controversial hands
Notably, several companies that purchase financial data from Robinhood have been investigated by the SEC for illegal trading. Citadel Securities LLC, one of Robinhood’s clients, was fined $22 million by the SEC (in January of 2017) for issuing “misleading statements” to brokerage firms “about the way it priced trades.”
Another Robinhood client, Wolverine Securities, was ordered by the SEC (in October of 2017) to pay a $1 million fine for insider trading. In addition to working with companies that have been fined or investigated for illegal trading, SeekingAlpha notes that there’s an “a material difference in the disclosures between what Robinhood and other discount brokers are showing.”
Hedge fund firm Two Sigma Investments, which also works with Robinhood, was subpoenaed by the SEC in 2014 over a questionable survey program aimed at obtaining financial information about various companies from stock market analysts.
Seeking alpha that broke this story first was quoted saying that
“Not only does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers’ orders for over ten times as much as other brokers who engage in the practice,” writes Seeking Alpha. “It’s a conflict of interest and is bad for you as a customer.”
“Let’s do some quick math. Assume the average stock traded has a share price of $50. It takes 20,000 shares traded at $50 for $1,000,000 in volume, for which E*TRADE makes $22 per $1,000,000 traded, which sounds like a small number until you realize they cleared $47,000,000 last quarter from this. But off an identical $1,000,000 in volume, Robinhood gets paid $260 from the same HFT firms. If Robinhood did as much trade volume as E*TRADE, they would theoretically be making close to $500 million per quarter in payments from HFT firms.”
Whether you call it a business model or a data security breach controversy, the practices that Robinhood is undertaking is not really appreciated by the community at large. An industry that is already struggling to built trust among users and community this is further bad. Will we will have to wait and see whether Robinhood reacts to these reports with an explanation. Also, one would want to watch if customers slowly begin pulling out of Robinhood app. Well coming days should give us an indication
Will Robinhood continue to sell user data, a practice not many appreciate? Do let us know your views on the same.