Robinhood Responds to Critique of Business Model

CryptoGlobe Staff Writer
  • 22 Sep 2018
  • /
  • 6808 views
  • The platform was accused of treating high frequency traders better than ordinary retail users and of selling user data.
  • The company responds denying allegations of preferential treatment and user data sale.

Following a series of allegations made by Logan Kane and published in Seeking Alpha, FinTech startup Robinhood has responded, defending its business model and denying accusations of favouring high frequency traders over retail users.

In the original article, Kane stated that the company “takes from the millennial and gives to the high-frequency trader” through its practise of accepting payments for order flow and offering order data for sale at over ten times the going rate of other brokers who carry out the same activity.

Robinhood Defends Itself

Speaking to Bitcoin.com, Robinhood stated that under the "best execution" framework, every licensed brokerage must execute customer orders at the best available price across every regional and national stock exchange. This is known as national best bid offer (NBBO). In other words, the company says that it is obligated to help its customers do business at the best available price, which is out of its control.

A quote from the company’s statement reads:

“[Robinhood] like the rest of the industry, participates in rebate programs which help customers get additional price improvement for their orders by creating competition amongst the exchanges and liquidity providers who fill the orders, often resulting in superior execution quality. Any rebates Robinhood receives do not adversely impact this best execution obligation.”

Further Rebuttals

Robinhood’s response to the accusation of “taking from millennials and giving to HFTs” is that unlike many comparable brokerages, it has established the same payment rate as its leading execution venues, which removes the incentive to direct orders to specific execution venues. Using an algorithm, the statement said, Robinhood automatically directs orders to several execution venues depending on potential execution quality and price improvement.

The company also firmly denied the charge of selling user data with identifying information to execution venues, stating that it “has not and will not sell customer information.

Regarding the conflict of interest claim, the company said: “No other factors impact where customer orders are routed.”

According to the company, execution quality is guaranteed to be the same regardless of the size of customer orders, be it a single share or 10,000 shares. Going further, the company revealed that its use of per dollar value over per share reporting does not in actual fact place its customers at any kind of disadvantage. According to the statement, due to its zero-commission trading model, it actually generates less revenue than if its rebate program were structured around shares.