Robinhood Faces Civil Fraud Investigation by SEC

Robinhood Markets faces a civil fraud investigation by the SEC for failing to disclose its practice of selling clients’ orders to high-frequency traders and other market makers.

03 September, 2020 | AtoZ Markets – Robinhood Markets, Inc. is a US financial services company. The company develops applications for managing funds such as stocks, exchange-traded funds, options, and cryptocurrencies. Robinhood offers mobile apps services for iPhone, Apple Watch, and Android. The company has no physical branches and operates completely online with zero fees.

Robinhood May Face $10M SEC Fine

Robinhood Markets faces a civil fraud investigation by the SEC for failing to fully disclose its practice of selling client orders with high-frequency trading (HFT) companies. HFT is the practice of using computer programs to trade large numbers of orders in a millisecond.

The investigation is at an advanced stage. If Robinhood agrees to settle with the SEC, the company might have to pay a fine of over $10 million.

The allegations disclosed in regulatory filings that until 2018, Robinhood had been making money from order flow payments. But, Robinhood reportedly did not disclose that it took payments from HFT companies for sending them customer orders to buy or sell stocks or options. However, Robinhood must fully disclose all the important facts to investors so that they can make informed decisions. A spokeswoman of Robinhood said:

“We strive to maintain constructive relationships with our regulators and to cooperate fully with them. We do not discuss or comment on our communications with our regulators.”

The SEC also said Robinhood’s early failures to fully disclose its practice of selling customer orders to trading giants like Citadel Securities and Two Sigma Securities.

According to the SEC, from the beginning, Robinhood made most of its profit by selling customer orders to high-speed traders and market makers. External companies also execute the trades and make a small profit from each trade. However, the regulator has concerned that the trades may not have the best interests of brokerage clients.

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