Robinhood May Face $10M SEC Fine Over Disclosure Failures

Robinhood is reportedly under investigation by the SEC for not fully disclosing that it was passing customer orders on to market makers.

Sep 3, 2020 at 9:46 a.m. UTC
Updated Sep 14, 2021 at 9:51 a.m. UTC

Robinhood is reportedly in hot water with a top U.S. regulator for not properly disclosing that it was making revenue by passing customer orders onto market makers.

  • Sources speaking to the Wall Street Journal (WSJ) for a report Wednesday said the Securities and Exchange Commission (SEC) is investigating the app-based trading platform
  • The allegations are that Robinhood, which is popular with retail investors, failed to disclose that it was selling order flow on its "How We Make Money" page – which was taken down in October 2018.
  • In the U.S., brokerages, like Robinhood, have to fully disclose all the material facts investors need to make an informed decision.
  • During this period, Robinhood did disclose in regulatory submissions that it was making revenue from order flow payments.
  • The SEC investigation is reportedly in an advanced stage, one WSJ source said.
  • CoinDesk approached Robinhood for comment but hadn't received a response by press time.
  • Payment for order flow is a practice where brokerage firms are compensated for routing customer orders to market makers for execution.
  • This creates business for market makers; for brokerages, it saves them executing thousands of varied and complex orders, creating a new source of revenue instead.
  • While legal, some have argued that selling order flow creates conflicts of interest for brokerage firms.
  • Robinhood does now disclose that it makes money from rebates from market makers, and argues that it helps create better prices for the customer.
  • Although Robinhood and the SEC haven't yet entered formal fine negotiations, one WSJ source said the trading app could be looking at a $10 million settlement.
  • A settlement could save Robinhood from having to admit to misconduct, one source said.
  • Robinhood offers trading of stocks, exchange-traded funds and options, as well as 17 cryptocurrencies.
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