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.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.