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SEC Probes Robinhood Over Payments to High-Speed Traders

September 4, 2020

Zero-commission brokerage Robinhood is the target of an SEC investigation over disclosures about how it routed customers’ orders, according to news reports.

The regulator is at an advanced stage of the investigation, which focuses on alleged failures to disclose that Robinhood passed orders to high-speed trading firms form which the company gained financially, people familiar with the matter tell the Wall Street Journal. But the two sides have yet to formally negotiate a proposed fine and are not likely to announce a deal this month, the sources tell the newspaper.

“We strive to maintain constructive relationships with our regulators and to cooperate fully with them,” a Robinhood spokesperson tells the Journal. The spokesperson declined to comment on the investigation or any discussions with regulators.

A spokeswoman for the SEC declined to comment to the newspaper as well. 

The probe specifically focuses on how Robinhood’s website, until 2018, failed to disclose that it earned payments from high-speed trading outfits for sending them its customers’ stock and option orders, people familiar with the matter tell the Journal. 

Known as payment for order flow, the practice is legal, and in fact common — it can even result in better prices for individual investors, the SEC wrote last month. But critics say it creates a conflict of interest and should have been disclosed as such, according to the newspaper. 

Until October 2018, Robinhood’s “How We Make Money” webpage listed fees for its margin-trading service and interest earned on customer deposits as its only two sources of revenue, the Journal writes. But payment for order flow made up under half of Robinhood’s revenue in 2017 and around half of it in 2018, a person familiar with the matter tells the newspaper.

In October 2018, the company updated its website to disclose that it “receives rebates from executing brokers,” and Robinhood’s co-founder and co-CEO Vladimir Tenev wrote in a blog post about the payments from high-speed traders, according to the Journal.

“The revenue we receive from these rebates helps us cover the costs of operating our business and allows us to offer commission-free trading,” he wrote, according to the newspaper.

In the first half of 2020, Robinhood earned $271 million from electronic trading firms, the Journal writes, citing new disclosure reports mandated by the SEC.

Robinhood’s co-founders, Baiju Bhatt and Tenev, started Robinhood after running a startup that made software for ultrafast trading-firms, according to the newspaper. 

Robinhood is reportedly also facing a probe from the SEC as well as Finra into the way the brokerage handled its trading platform’s outages in March. Those outages have also led to several lawsuits. In 2019, Finra fined Robinhood for best execution violations on customer equity orders, as reported. 

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By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here if you have a paid subscription.
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Tags:  Technology , Fees and compensation , Regulatory/legal issues

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