Robinhood Financial pays $ 65 million to arrange SEC probe

The Securities and Exchange Commission said Robinhood’s clients were getting prices lower than other brokers.



WASHINGTON – Robinhood Financial LLC has agreed to pay $ 65 million to settle regulatory claims that it failed to publicly disclose its business deals with fast-paced trading firms, the Securities and Exchange Commission said Thursday.

The deal resolves an SEC investigation that looked at Robinhood’s failure until 2018 to reveal on its website how it makes money on its deals with fast-paced trading firms such as Citadel Securities and Virtu Financial Inc.

Robinhood and other retail brokerage companies generate revenue by forwarding customers’ orders to fast merchants, who pay for the right to execute many of the trades.

The practice, known as payment for order flow, can create a conflict of interest for brokers like Robinhood because of the incentive to send orders to the highest bidder. Retail brokers say the practice can generate slightly better prices for clients than if they were trading on a stock exchange, and allows the brokers to offer commission-free trading.

However, Robinhood’s clients were given prices “that were lower than other brokers’ prices,” the SEC said in a press release. The company nevertheless claimed on its website from 2018 to 2019 that the quality of order execution was as good as or better than its rivals, ” said the SEC.

Robinhood resolved the case without admitting or denying the SEC’s claims, saying the settlement applies to issues that “Robinhood does not reflect today.”

“We recognize the responsibility that comes with helping millions of investors make their first investments, and we are committed to continuing to develop Robinhood as we grow to meet the needs of our customers,” said Dan Gallagher, Chief Robinhood Legal Officer.

With millions of new traders signing up for the investment app Robinhood, the company is under scrutiny for allowing some inexperienced users to make risky bets. WSJ spoke to a financial education professional and two Robinhood traders about how the app is shaking up the brokerage industry.

Write to Dave Michaels at [email protected]

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