In a year of record-breaking growth, trading app Robinhood has also faced troubles along the way. The latest issue sees the popular millennial, commission-free, investing app fall under civil fraud investigation with the Securities and Exchange Commission (SEC). Robinhood may be facing a fine in excess of $10 million for failure to completely disclose its practice of selling clients’ orders to high-speed trading firms.
Founded in 2013 by Baiju Bhatt and Vladimir Tenev, Robinhood has found unprecedented success in recent months, allowing individuals and starting investors to trade stocks, options, and cryptocurrencies without paying commissions. In its latest funding round, Robinhood was valued at $11.2 billion, hedging it in the ranks of fintech giants. Despite a record increase in subscribers in 2020, the company has also come under fire for outages that prevented customers from trading, cancelling plans to expand to the U.K., and other challenges.
High-speed trading requires using computer programs to transact a large number of orders in a fraction of a second. It was not until 2018 that Robinhood disclosed that it took payments from high-speed trading firms for sending them customers’ orders to buy or sell stocks or options. While taking payments for this practice to fulfill clients’ orders is legal, it is regarded as controversial due to the conflict of interest created that could lead to the exploitation of small investors. The SEC requires brokers to be transparent with investors about whether they use this practice. It was revealed that Robinhood earns a substantial part of its revenue from payments by the high-speed trading firms it collaborates with—half of its revenue in 2018 and $271 million in the first half of 2020 alone.
It has been disclosed that the probe against Robinhood is at an advanced stage, with the company in negotiations as to the final amount and proposal of the fine. Should Robinhood choose to settle with the SEC and pay the issued fine, it will not need to admit to any wrongdoing. While the SEC spokeswoman has declined to comment on this investigation, a Robinhood spokeswoman merely shared that the company strives “to maintain constructive relationships with [their] regulators and to cooperate fully with them.”