Robinhood is been under investigation by a leading United States regulator for not properly disclosing that it was making revenue bypassing users’ orders onto market makers.
In line with a recent official report by ‘Wall Street Journal’, the SEC [Securities & Exchange Commission] is investigating the application-based trading platform.
The allegations are that Robinhood, which is renowned among retail investors, however, didn’t disclose that it had been selling order flow on its “How We Make Money” page – that was taken down earlier in October 2018.
Within the United States brokerages, like Robinhood, got to fully disclose all the actual facts that investors need to make an informed decision.
Within this era, Robinhood did disclose in regulatory submissions that it had been making revenue from order flow payments.
The SEC investigation is reportedly in a complicated stage, one WSJ source added.
Payment for order flow is a practice where brokerage firms are compensated for routing user orders to plug makers for execution.
This creates business for market makers; for brokerages, it saves them executing thousands of various & sophisticated orders, forming 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, & argues that it helps create better prices for the users.
Although Robinhood and therefore the SEC haven’t yet entered formal fine negotiations, one WSJ source added that the trading application might be looking at a $10 Mln settlement.