Robinhood and other retail brokerage firms generate revenue by directing customer orders to high-speed traders.
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Andrew Harrer / Bloomberg News
WASHINGTON – Robinhood Financial LLC has agreed to pay $ 65 million to resolve regulatory claims that it did not sufficiently disclose its dealings with high-speed trading companies, the Securities and Exchange Commission said Thursday.
The deal resolves an SEC investigation that analyzed Robinhood’s failure until 2018 by revealing on its website how it makes money with its fast-track businesses like Citadel Securities and Virtu Financial Inc.
Robinhood and other retail brokerage firms generate revenue by routing customer orders to high-speed traders, who pay the right to execute many of the transactions.
The practice, known as order flow payment, can create a conflict of interest for brokers like Robinhood due to the incentive to send orders to the highest bidder. Retail brokers say the practice can generate slightly better prices for customers than if they were listed on a stock exchange and allows brokers to offer transactions without commissions.
However, Robinhood customers earned prices “lower than other brokers,” the SEC said in a press release. However, the firm stated on its website from 2018 to 2019 that its order execution quality was as good or better than its rivals, ”the SEC said.
Robinhood resolved the case without admitting or denying the SEC’s allegations and said the agreement applies to issues that “today do not reflect Robinhood.”
“We recognize the responsibility of having helped millions of investors make their first investments and are committed to continuing to evolve Robinhood as we grow to meet the needs of our clients,” said Dan Gallagher, Robinhood’s legal director.
As millions of new traders sign up for the Robinhood investment app, the company is being examined to allow some inexperienced users to make risky bets. WSJ spoke with a financial education professional and two Robinhood traders about how the app is shaking up the brokerage industry.
Write to Dave Michaels to [email protected]
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