financial advisor losses with mediation

How To Recover Financial Advisor Losses With Mediation

Apr 5, 2021

If you have lost money in your investments you might just chalk it up to the stock market or the performance of your investment. There are many investors who simply shrug off their investment losses due to market conditions, when in fact it may be the fault of their stockbroker or financial advisor. For example, it could be that the investment was unsuitable for you, or that the risks of the investment were not fully disclosed. One popular way to recover your losses is by mediating your claims by hiring an investment fraud lawyer. The Financial Industry Regulatory Authority  (“FINRA”) has a mediation program that allows for a fast settlement of claims recovery of losses for investors. What is the Difference Between Mediation and Arbitration? If you opened a brokerage account, chances are you are limited to arbitrating your case through the FINRA dispute resolution forum. When you hire a FINRA arbitration attorney, he or she will file your claim with FINRA and go through the process of document discovery and prepare for your final arbitration hearing. Generally, your arbitration claim will follow a parallel track where your FINRA attorney prepares your case for a final hearing, but, at the same time, the parties can agree to engage the services of a FINRA mediator to help resolve the dispute.  FINRA Mediation Differs From FINRA Arbitration  Resolving your case through FINRA mediation differs from resolving it through a FINRA arbitration hearing. A final arbitration hearing is where arbitrators hear your claims, listen to the witnesses (including experts),  examine the evidence and arguments of your attorneys, and make a final award that is binding and generally not subject to an appeal.  On the other hand, mediation is really nothing much more than a settlement conference conducted using an experienced mediator. In a FINRA mediation, the mediator cannot bind either party to a settlement amount,  but instead the mediator facilitates settlement discussions. The mediator is typically someone experienced in FINRA arbitration who can help both parties by evaluating the strengths and weaknesses of their positions in the case. By agreeing to a settlement amount in mediation, the parties can control the outcome of their case and not leave it up to a panel of arbitrators to decide their claims.   Sometimes experienced attorneys negotiate a settlement directly with the attorneys on the other side of the case. But, in cases where one client may be stubborn or if the direct settlement is ineffective, it helps both sides to have a mediator, who is an objective third party, to evaluate the case and guide the parties to a successful settlement.  There are only a handful of mediators who specialize in securities arbitration cases. An experienced FINRA attorney will know these mediators and choose one that is right for your case.  Who Pays the Mediator? Typically, the parties must initially agree to share the cost of the mediator, which can sometimes run up to several thousand dollars. While this fee may seem large, it is significantly lower than the cost of paying the FINRA arbitrators their daily rate to hear your case at an arbitration hearing.   […]

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investment fraud tactic and red flags

Look Out For Common Investment Fraud Tactics And “Red Flags”

Mar 29, 2021

Scam artists don’t discriminate among victims. Almost anyone can be the victim of investment fraud. Our law office has seen people of many different educational levels,  age groups, professions, and backgrounds lose money in investment scams. The best thing you can do to protect yourself from investor fraud is to be on the lookout for common fraud tactics and to be able to recognize popular “red flags” of stockbroker abuse and misconduct.  The Financial Industry Regulatory Authority (also known as FINRA)  has created a list of the seven most common “red flags” of investment fraud.  FINRA’s top warning signs to watch for to stay on guard and avoid becoming drawn into a scam: 1. Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way. All investments carry some degree of risk. 2. Unregistered products: Many investment scams involve unlicensed individuals selling unregistered securities—ranging from stocks, bonds, notes, hedge funds, oil or gas deals, or fictitious instruments, such as prime bank investments. 3. Overly consistent returns: Any investment that consistently goes up month after month—or that provides remarkably steady returns regardless of market conditions—should raise suspicions, especially during turbulent times. Even the most stable investments can experience hiccups once in a while./ 4. Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success. Legitimate professionals should be able to explain clearly what they are doing. It is critical that you fully understand any investment you’re seriously considering—including what it is, what the risks are and how the investment makes money. 5. Missing documentation: If someone tries to sell you a security with no documentation—that is, no prospectus in the case of a stock or mutual fund, and no offering circular in the case of a bond—he or she may be selling unregistered securities. The same is true of stocks without stock symbols. 6. Account discrepancies: Unauthorized trades, missing funds or other problems with your account statements could be the result of a genuine error—or they could indicate churning or fraud. Keep an eye on your account statements to make sure account activity is consistent with your instructions, and be sure you know who holds your assets. For instance, is the investment adviser also the custodian of your assets? Or is there an independent third-party custodian? It can be easier for fraud to occur if an adviser is also the custodian of the assets and keeper of the accounts. 7. A pushy salesperson: No reputable investment professional should push you to make an immediate decision about an investment, or tell you that you’ve got to “act now.” If someone pressures you to decide on a stock sale or purchase, steer clear. Even if no fraud is taking place, this type of pressuring is inappropriate. There are also some less common but important red flags such as: 1. A stockbroker who pushes buying on margin or using equity from your retirement account; 2. A new account form that asks for little more than the investor’s name, address and social security number, or a stockbroker who does not discuss the investor’s current assets, goals for investment […]

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FINRA arbitration

What To Expect When You File a FINRA Arbitration Claim?

Mar 1, 2021

If you are reading this blog, it’s likely that you lost money due to investment fraud or broker negligence and are seeking to understand the FINRA arbitration claim process and perhaps find an experienced attorney to handle your case. Our experienced and dedicated attorneys have recovered tens of millions of dollars for investors who have been the victims of investment fraud or brokerage fraud. We have over 25 years of experience representing investors in FINRA arbitrations. Chances are, if you have a brokerage account, you are obligated to bring your claims before FINRA in its arbitration forum.  This is because  FINRA member firms have agreements with the customers subjecting them to mandatory arbitration.  This should not concern you because your securities fraud claim will be heard, just not in a traditional court. Why am I stuck in Arbitration? When you opened up an account with your brokerage firm, you probably signed a document or clicked an agreement giving up your legal right to bring a lawsuit for securities fraud or negligence. If you do not remember doing this, this is not uncommon. The vast majority of brokerage firm and investment account customer agreements contain a FINRA pre-dispute arbitration clause. There has been a lot of discussion in the media about mandatory arbitration in consumer cases and some people think this is unfair. However, the Supreme Court of the United States has decidedly ruled that brokerage firms have the right to do so. While giving up the right to bring a lawsuit may seem like a negative thing to an investor, all in all, the FINRA arbitration has some big benefits as well.  The prime benefits of FINRA arbitration versus court are 1) the process is quicker (generally you will get to a hearing within a year when court cases can take years to go to trial); 2) Unlike court, there are no depositions and the only discovery is an exchange of documents by the parties; 3) FINRA arbitration is much cheaper due to the streamlined nature of the process; 4) you get to rank and select the arbitrators who will hear your case, rather than your case being assigned to a judge; 5) there is generally no right of appeal—absent very narrow circumstances; 6) most FINRA arbitration cases tend to settle prior to a final hearing while court cases may not since the defendant always has the right (and money to fund) an appeal.  Be Sure to File Your FINRA Arbitration Claim on Time Unlike court, the FINRA forum has an “eligibility” rule, requiring that all claims must be brought within six years of the occurrence or event giving rise to the dispute.  If you fail to take action in time, you may lose the ability to take action at all. However, it must be noted that securities dispute cases are incredibly complex and this is not the only time rule. In addition to the eligibility, various types of claims may have their own statutes of limitations that are even shorter. For example,  Florida has enacted a four-year statute of limitations for negligence claims, and various states have their own […]

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Tips For Investing In Non-traded REITS

Tips For Investing In Non-traded REITS

Feb 22, 2021

Sales of non-traded real estate investment trusts topped $1.1 billion in December 2020, the highest total since February and a 30 percent increase from the $859 million raised in November, according to investment bank Robert A. Stanger & Company. And, many of these have been sold to unsophisticated retail investors. While generally an investor can easily buy and sell shares of publicly-traded REITs, it’s much harder to sell a non-traded one. They also tend to have longer holding periods, some up to 10 years. Brokers like non-publicly traded REITS because the front-end fees are large—sometimes as much as 15% just for selling this one product. Non-traded REITS are often recommended to investors seeking income, and,  in a low-interest environment, they appeal to people because they appear to be backed by real estate assets. What most investors do not know, however, is that often these non-traded REITs are highly leveraged and may be paying their investors with this borrowed money, or just giving the investor their money back as a distribution. Brokerage Firms Have been Fined for Improperly Selling Non-Traded REITs Non-Traded REITs have also been the subject of recent regulatory actions. It has been reported that NEXT Financial Group,  a Houston-based broker-dealer, will pay $475,000 in fines to settle charges that it placed investors in unsuitable non-traded real estate investment trusts. Some of these unsuitable sales of non-traded REITs include sales to investors over 80 years old. The Enforcement Section of the  Massachusetts  Securities Division filed a complaint against LPL Financial, LLC for improprieties in the sales of seven non-traded REITs. In recent years, LPL has come under fire from customers and regulators for what are considered the inappropriate sales of REITs. New Hampshire and New Jersey have also filed actions against  LPL over this alleged misconduct in the sale of non-traded REITs by its brokers.  What Exactly is a REIT? REIT, short for a real estate investment trust, is a company that owns, and generally operates, income-producing real estate or real estate-related assets.  REITs pool the capital of numerous investors to purchase a portfolio of properties—from office buildings and shopping centers to hotels and apartments, even timber-producing land—which the typical investor might not otherwise be able to purchase individually. Types of such income-producing real estate assets owned by a REIT include real assets (such as an apartment or commercial building) or real estate-related debt (such as mortgages).  How is a Publicly Traded REIT Different from a Non-Traded REIT? Publicly traded REITs (sometimes referred to as exchange-traded REITs) are registered with the SEC, file regular reports with the SEC, and are listed on an exchange such as the NYSE.  Similar to stocks listed on an exchange, you can buy and sell a publicly-traded REIT easily.  This is why an investment in a  publicly-traded REIT is generally often called a “liquid” investment. Because a publicly-traded REIT is listed on an exchange,  you can easily determine its value by looking up the share price at which the REIT is trading. A non-traded REIT is also registered with the SEC and files regular reports with the SEC. However, these investments are not listed on any […]

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ponzi scheme

GPB Losses? Learn the Signs of a Ponzi Scheme Before You Fall Victim to One

Feb 15, 2021

Last week, the Securities and Exchange Commission (“SEC”) announced charges against investment adviser GPB Capital Holdings (“GPB”) and three of its principals David Gentile, its owner and CEO, Jeffry Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, and Jeffrey Lash, GPB Capital’s former managing partner. They were charged with defrauding over 17,000 retail investors in a massive Ponzi-type scheme that raised 1.7 billion dollars. As stated in the SEC’s complaint, GPB described itself as a New York-based alternative asset management firm acting as a general partner and fund manager for limited partnership funds. The limited partnership funds invested in various businesses primarily focused on automotive retail, waste management, and healthcare. Since its founding in 2013, GPB has raised an astounding amount totaling $1.7 billion from approximately 17,000 retail investors nationwide, approximately 4,000 of whom are seniors. Nearly all of the $1.7 billion raised is still at risk.   GPB marketed its investments through Ascendant Capital and AAS, a registered broker-dealer which, in turn, promoted the investments to dozens of broker-dealers nationwide who also sold them. The complaint alleges that investors were told their 8% monthly distributions would be fully covered by profits of the portfolio’s companies, even though GPB’s executives knew about shortfalls. But, as is the case in most Ponzi schemes, the earlier investors were at least partially paid with funds from new investors. In order to carry out the scheme, the defendants allegedly falsified financial statements and created back-dated performance guarantees to show income that was not really earned. GPB was also charged with violating whistleblower protection laws by threatening to enforce a confidentiality agreement and retaliating against an individual known to be working with the SEC against GPB’s interest.  Learn to Spot Signs of a Ponzi Scheme Before You Fall Victim to One In a traditional Ponzi scheme, the fraudster uses funds from new investors to pay the fictitious “returns” to exist investors. In reality, there is no real profit being made by investing, it is simply the money coming in from new investors that are paid to the earlier investors. Once the scammer is unable to find any more new investors, the jig is up and the scheme falls apart. When more investors need to get money back from their investments than there is money to pay out, the scam is exposed. With no new money flowing in, the investors cannot get their money out. This is the most typical way a  Ponzi scheme is ultimately uncovered.  The Financial Industry Regulatory Authority (“FINRA”) has laid out 7 warning signs to  alert potential investors to a potential investment scam: https://www.finra.org/sites/default/files/FINRA-Investor-Alert-Avoiding-Investment-Scams.pdf 1. Guarantees: Be suspect of anyone who guarantees that an investment will perform a certain way. 2. Unregistered products: Unregistered securities sold by unlicensed individuals are often fictitious. 3. Overly consistent returns: Investments that consistently go up—or provide remarkably steady returns regardless of market conditions—should raise suspicions. 4. Complex strategies: Avoid anyone who credits a highly complex investing technique for unusual success. 5. Missing documentation: Be wary if there is no prospectus, offering circular or stock symbol. 6. Account discrepancies: Keep an eye on your account […]

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investment fraud lawyer

5 Things to Consider When Picking an Investment Fraud Lawyer

Feb 1, 2021

While most people go through life not ever thinking that they may need to hire a lawyer, there will likely be events in your life where you will need to hire one. For example, if there is a death in your family, you may need to hire an estate attorney. If you are going through a divorce, you might need to hire a family lawyer. If you have suffered investment losses, you will need to hire an Investment Fraud Lawyer. When hiring an Investment Fraud Attorney, make sure you ask the following five questions to ensure that you have found the right lawyer to help you recover your investment losses. 1. WHAT IS YOUR EXPERIENCE? While many attorneys represent that they can handle investment fraud cases, only a handful of attorneys actually have 20 or more years of experience handling FINRA arbitrations—which is where most cases are required to be brought if you are suing a brokerage firm. Make sure that you ask the prospective lawyer how many investment fraud cases he or she has handled and how many years of experience that attorney has worked in this specialized area of FINRA arbitration. Because an experienced investment fraud lawyer will likely know most of the lawyers representing the defendant brokerage firms, these relationships can go a long way in advancing your case to hearing or to settlement discussions. Additionally, experienced lawyers in this area will also be familiar with the roster of potential FINRA arbitrators who may hear your case. Knowing which arbitrators to select to hear your potential case can make a huge outcome in the results of your case. 2. WHO WILL HANDLE MY POTENTIAL CASE? Ask how your potential case will be staffed, who will be working on your case, and who will communicate with you regarding your case. You will want to know that the attorney you will be hiring will also be the main attorney who is handling your case. Ask how the case will be staffed internally and how you will be updated on the status of your case. Additionally, ask whether the lead attorney will be writing and reviewing the key pleadings and motions as they are filed in your Investment Fraud Case, and who will be the lead trial attorney on your case. Finally, find out if there is a paralegal who will be assigned to help you assemble the documents you will need to provide to the attorneys to assist in proving your case. While you may want to hire a big firm to handle your case, make sure that you know who at the firm will be the responsible attorney on a day to day basis. 3. HOW MANY CASES HAVE YOU TAKEN TO TRIAL? Ask the lawyers how many cases that attorney has brought to a final arbitration hearing or trial as well as the results of those hearings or trials. While many attorneys handle FINRA Arbitration cases, not all of these attorneys will actually take these cases all the way through a final hearing. While it is true that a large percentage of FINRA arbitrations settle prior to […]

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brokerage account hack

Has Your Brokerage Account Been Hacked?

Jan 11, 2021

The use of social media platforms such as Facebook, YouTube, Twitter, and Reddit by investors is now commonplace. The Securities and Exchange Commission has warned that the use of such media platforms and apps comes with a larger risk of fraudulent conduct. Recently, investor’s account numbers and passwords have been reported up for sale on the dark web.   CNBC has reported that “for just a few dollars, criminals are selling credentials for customers of E*Trade, Charles Schwab, TD Ameritrade, Robinhood Financial, and others.” This demand has only increased during the pandemic. Perhaps one reason that Robinhood and other trading platform users are victims of account hacking is because of their customers’ use of social media to tout their investment success. When investors publicly announce their investment success on a platform such as Reddit or Twitter, that investor draws attention from the hackers which may act like “online bait” to the hackers. Hackers use this information to get access to an individual’s brokerage accounts, sell the securities, and transfer out the proceeds to their own fictitious accounts. Users of the Robinhood platform reportedly complained that hackers liquidated their investments and withdrew balances to payment apps. Customers complained that they had no way to contact a customer service representative via phone when they saw their accounts being depleted. Robinhood Accounts are Vulnerable to Hacking In October 2020, Bloomberg reported that access to more than 10,000 email login credentials allegedly tied to Robinhood customer accounts was available for sale on the dark web.  It has also been reported that the number of Robinhood-related emails for sale on the dark web outnumbers those for other brokerage firms by about 5-to-1 due in part to a belief that these accounts are easier to access. An internal probe by Robinhood found that 2,000 of its customer’s accounts had been hacked. While  Robinhood has acknowledged instances of hackers accessing its customer’s accounts,  it noted that these hacks did not stem from a breach of its systems. To increase customer confidence in the security of their online platforms, some firms like Fidelity and E*Trade have offered fraud protection for the unauthorized use of customer’s brokerage accounts. Firms such as Robinhood have also beefed up their authentication systems sometimes asking for two-factor authentication to ensure the customer is the one accessing their account. Beware of  Phishing Scams Designed to Get Access to Your  Private Information In most cases, the hack happens outside of the brokerage firm and directly targets the individual investor. Potential hackers can find a wide variety of information to access someone’s brokerage account on the dark web using specific malware or software to access it. Another common way is by “phishing.” According to a FINRA Investor Alert,     phishing scams typically involve emails that falsely claim to be from brokerage firms, banks, credit card companies, Internet auction sites, electronic payment services, or some other service that you use. In other instances, the emails purport to be from government agencies. To appear genuine, these emails may use: a) The names of real people. b) Legitimate looking email addresses, such as support@[name of your financial institution].com. […]

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robinhood trading

Robinhood Trading Can Cost You More than You Think

Dec 28, 2020

Last week the Securities and Exchange Commission (“SEC”) announced charges against Robinhood Financial LLC (“Robinhood”) with respect to the prices paid and received by its customers on trades made through its platform. Robinhood was charged with making repeated misstatements failing to disclose its receipt of payments from trading firms for routing customer orders to it as well as for its failure to comply with its mandated duty to seek the best execution for its customer’s orders. In connection with settling these charges, Robinhood agreed to pay $65 million dollars. This sanction was in addition to FINRA’s action regarding similar conduct.  The SEC’s order states that Robinhood misleads customers by failing to reveal its largest revenue source when describing how it made money. This revenue stream, called “payments for order flow,” came from outside trading firms and was paid in exchange for Robinhood’s sending customer orders to them. Despite Robinhood’s representations to customers that trading was “commission-free,” this was not completely transparent. In fact, according to the SEC’s order,  because of its unusually high payment for order flow rates as compared to other firms, Robinhood’s customers’ orders were executed at inferior prices.  The SEC charged that these inferior trade prices collectively cost Robinhood customers $34.1 million even after taking into account customer savings from not paying commissions.   Broker-Dealers are Required to Execute Customer Trades at the Best Price  Brokerage firms are required to get the “best execution” of orders for their customers. Best Execution—requires firms to use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.  The SEC found that in March 2019 Robinhood was aware that its execution prices were worse than its competitors. An internal analysis done by Robinhood concluded that “[n]o matter how we cut the data, our % orders receiving price improvement lags behind that of other retail brokerages by a wide margin.” Robinhood knew that the amount of price improvement obtained for Robinhood customers was far lower than at competing broker-dealers, measured on a per order, per share, and per dollar traded basis.  That analysis revealed that for most orders of more than 100 shares, Robinhood customers would be better off trading at competitors because the additional price improvement that such orders would receive would likely exceed the approximately $5 per-order commission costs at those other firms. The internal analysis further found that the larger the order, the more significant the price improvement losses were for Robinhood customers. For example, in customer orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares. Senior management at Robinhood was aware of this, according to the SEC. Accordingly, the Director of the SEC’s Enforcement Division stated  that “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm.” Noting that online trading platforms are creating alternative ways for customers to invest, the […]

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exchange-traded products

Have You Lost Money In a Volatility-Linked Investment?

Nov 23, 2020

When the market is volatile, some brokers may recommend investments in exchange-traded products (“ETPs”) designed to protect the investor against losses. Such investments, called “volatility linked investments,” can be risky. The Financial Industry Regulatory Authority (“FINRA”) has warned that investors could risk major losses if they trade volatility-linked ETPs without fully understanding them. Some may believe, for example, that the products could be used as a long-term hedge on equity positions in the event of a market downturn. In fact, FINRA has stated,  most volatility-linked ETPs are generally short-term trading products that can degrade significantly over time and are not designed to be used as a long-term buy-and-hold investment. On November 13, 2020, the Securities and Exchange Commission (“SEC”) announced settlements with three investment advisory firms and two dually registered firms for unsuitable sales of complex volatility-linked exchange-traded products to retail investors.  The settling firms were American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc.  As part of that settlement, more than $3 million will be returned to harmed retail investors. The SEC’s actions each involved sales of volatility-linked exchange-traded products designed for the short term, but which were sold to clients as long-term holdings.  Offering documents for the exchange-traded products showed that the short-term nature of these investments made investors in them more likely to experience a decline in value when held over a longer period, the SEC said. The sales dates vary by firm, and collectively occurred between January 2016 and April 2020.  The SEC stated in its announcement of the settlements that “Contrary to warnings in offering documents, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances for months and years.” Further, the SEC focused on the firms’ supervision of such sales noting that “[i]t is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk.”  The SEC issued individual cease and desist orders against the five firms. The SEC alleged that American Portfolio Financial Services Inc and affiliate American Portfolios Advisors Inc. failed to reasonably supervise certain brokerage representatives who recommended their customers buy and hold iPath S&P 500 VIX Short–Term Futures ETN, a volatility-linked product (“VXX”). The SEC’s order against Summit Financial Group Inc. also alleged improper supervision relating to the recommendation to buy and hold iPath S&P 500 VIX Short–Term Futures ETN. The order against Benjamin Edwards finds that the firm failed to reasonably supervise certain brokerage and advisory representatives who recommended their clients buy and hold iPath S&P 500 VIX Short–Term Futures ETN and ProShares VIX Short-Term Futures ETF, which traded under the ticker symbol VIXY (“VIXY”).  The SEC’s order against Securities America Advisors finds that the firm’s representatives either bought or recommended the unsuitable purchase and holding of VelocityShares Daily Inverse VIX Short Term ETNs linked to the S&P 500 VIX Short-Term Futures Index (“XIV”) and ProShares VIX […]

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robinhood

Why Robinhood Makes Trading “Free”

Nov 9, 2020

Have you ever wondered how online trading platforms make money if your trading is supposedly “free?” Despite not charging customers to trade, Robinhood made $180 million from its customer’s trades in the second quarter of 2020 — about double that from the prior quarter, according to a recent Securities and Exchange Commission regulatory filing.  What Is Payment For Order Flow? Like the other online brokerage firms such as Schwab, E-Trade, and TD Ameritrade, Robinhood makes its money on what is called “payment for order flow” instead of traditional commissions. That way, it can advertise to its potential customers the advantage of “free” trading.  This business model relies on payment for order flow which is essentially a back-end payment paid to Robinhood by a third party that executes the trade. According to the SEC, payment for order flow is when a market maker (a firm that buys and sells securities on a regular and continuous basis at a publicly quoted price) agrees to pay your brokerage firm for routing your order to them. Payment for order flow is one of the ways your brokerage firm can make money from executing your trade.    With an online firm such as Robinhood that executes millions of trades, this payment for order flow is quite a profitable business model. According to its own public filings, Robinhood made 271 million dollars from this type of payment in the first half of 2020. Robinhood did not always properly disclose this fact to its customers. In fact,  according to the regulators, although more than half of Robinhood’s profits came from payment for order flow in 2018, until October 2018, the section of Robinhood’s website called “How We Make Money” disclosed only that it profits from margin trading services and interest earned on customers’ deposits. It failed to mention that it also makes money from selling customers’ orders for stock and options trades to high-speed trading firms, known as payment for order flow. As reported by the Wall Street Journal, Robinhood is facing a civil fraud investigation over this earlier failure to fully disclose its practice of selling client orders to high-speed trading firms.  Robinhood has Made Millions on Its Client’s Frequent Trading  The majority of Robinhood’s recent profits are from the trading of options which are generally held for a shorter term, and traded more frequently, than stocks. How do options trading help Robinhood and other online firms make more money? This is because payments for options orders are significantly higher. Some have criticized Robinhood for encouraging inexperienced investors to trade options, and research has shown that options trading is generally detrimental to individual investors. Robinhood reported that during the pandemic, it saw deposits into its accounts that were equal to or multiples of the stimulus checks from the Trump administration’s $2.2 trillion CARES Act and that young traders see market downturns as “buying opportunities.” Robinhood seems to have perfected a business model where it reaps more money than its online competitors in payment for orders. As reported in a study of SEC filings done by Piper Sandler (below), Robinhood made the most money per 100 shares in […]

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