Robinhood is under civil fraud investigation by the Securities and Exchange Commission (SEC), and according to The Wall Street Journal, it could pay a fine exceeding $10 million. The no-commission investment app, which recently scrapped its planned UK expansion even though enjoyed a surge in popularity during the pandemic, apparently didn’t disclose until 2018 that it sells clients’ orders to high-speed trading firms.
While taking payments from those firms to fulfill clients’ orders is legal, it remains controversial, with critics arguing that it creates a conflict of interest and could lead to the exploitation of small investors. The SEC requires brokers to disclose to investors if they use the practice, which is called “payment for order flow.” However, Robinhood didn’t put the information on its website until 2018, five years after it was founded.
It probably doesn’t help Robinhood’s case that it gets a huge part of its revenue from payments made by the high-speed trading firms it works with. Half of its total revenue in 2018 came from the practice. And when it finally disclosed the revenue source on its website that year, co-founder Vladimir Tenev published a post revealing that those payments help Robinhood “cover the costs of operating [its] business and [allow it] to offer commission-free trading.” The company continues to make big money from the practice and had already made (PDF) $271 million from it in the first half of 2020.
WSJ’s source said the investigation is at an advanced stage, but the two parties have yet to agree on a fine. Robinhood’s spokesperson refused to confirm the probe, only telling the publication that the company “strive[s] to maintain constructive relationships with [its] regulators and to cooperate fully with them.”