Retail brokerage Robinhood Financial did not report a particular type of stock trading it conducted for clients to a public data feed last year, according to regulatory data analyzed by Reuters and a source familiar with the case. Many brokers offer so-called fractional shares. They let investors buy a portion of a stock instead of the whole thing, so instead of spending more than $ 3,000 on a share of Amazon.com Inc, an investor can buy as little as $ 1 worth $ 1.
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Brokers are required to report all their transactions to trading execution facilities (TRFs), under the rules of the Financial Industry Regulatory Authority (FINRA) and the rules of the United States Securities and Exchange Commission. FINRA’s enforcement has fined other brokers, including Merrill Lynch and the US securities division of Deutsche Bank AG, for past reporting and supervisory violations.
Robinhood launched its fractional stock service in December 2019, according to its website, but did not begin publicly reporting on trade executions until the week of January 25, 2021, FINRA data regarding over-the-counter trades shows. Data before then does not show any transactions reported by Robinhood.
Robinhood’s lack of reporting to a transaction execution facility was confirmed by a person familiar with the company who asked not to be identified to discuss an issue that is not public.
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Reuters was unable to determine how many transactions Robinhood failed to report. As of December 31, Robinhood users owned $ 802.5 million worth of stock purchased through the fractional stock program, the brokerage said in a legal filing. Many of those purchases may have been made by wholesale brokers.
A Robinhood spokeswoman declined to comment on the reporting issue, but said the company, which had 13 million customers in November, fulfills only a “very small percentage of its fractional orders from its own inventory.”
A spokesman for FINRA, which oversees brokers, declined to comment.
When stocks are traded on exchanges, everyone can see the activity. But when stocks are traded over-the-counter, as is the case with Robinhood, investors rely on brokers to report the trades to the TRF. The information helps determine the stock prices. When certain transactions are not publicly reported, it reduces the amount of information available to market participants and can create an uneven playing field, FINRA says.
Still, some experts said that while the omission was severe enough to warrant fines to keep it from happening again, it wasn’t a big mistake. That’s because the number of trades that go unreported would be a tiny fraction of the total trade, these people said.
“Do they have to earn to get a parking ticket for it? Yes. Does it have to be painful enough that they don’t do it again? Yes,” said James Angel, a professor of finance at Georgetown University specializing in market structure, when Reuters announced the presentation. data to him. ‘Does it have to be so overwhelming that it bankrupts them? No, it is not.’
The reporting was dropped as the company, which filed an initial public offering last month that sources said Reuters valued at about $ 30 billion, grew rapidly and legions of new retailers entered the market.
The FINRA rules state that all trades must be reported – including trades of less than a stock – in the name of transparency, as market participants can base decisions on understanding not only prices, but also who trades what and when.
Unlike full stock orders, which Robinhood sends to wholesale brokers en masse to execute, Robinhood says its clearing broker, Robinhood Securities, executes fractional trades from its own account, for which it is licensed by FINRA.
Robinhood exported approximately 1.86 million Tier-1 shares in the week of March 15, and approximately 3.51 million Tier-2 shares in the week of March 1, the latest FINRA data shows.
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Tier 1 securities include stocks in the S&P 500 Index, Russell 1000 Index and exchange traded products, while Tier 2 includes smaller companies.
(Reporting by John McCrank; editing by Megan Davies and Paritosh Bansal)