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Robinhood Hit by SEC Fraud Probe With Potential $10 Million Fine

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  • Millennial trading app Robinhood is under investigation by the Securities and Exchange Commission for failing to disclose that it was selling orders from clients to high-speed trading firms.
  • The online brokerage could be forced to pay a $10 million fine if it fails to settle with the SEC, sources told the Journal.
  • The investigation revolves around the early failure of Robinhood to properly disclose its practice of selling orders from clients to trading titans such as Citadel Securities and Two Sigma Securities.
  • Visit The Financial Today’s homepage for more stories.

Millennial trading app Robinhood is under investigation by the Securities and Exchange Commission for failing to disclose that it was selling orders from clients to high-speed trading firms, The Wall Street Journal first published on Wednesday, the latest in a string of the online broker’s troubles amid its unprecedented growth.

Robinhood is facing an SEC civil fraud investigation, allegedly at an advanced stage, over its dealings with high-speed trading companies.

The online brokerage could be forced to pay a $10 million fine if it fails to settle with the SEC, sources told the Journal.

The investigation revolves around the early failure of Robinhood to properly disclose its practice of selling orders from clients to trading titans such as Citadel Securities and Two Sigma Securities.

According to an investigation carried out by Forbes earlier this month, despite its proclamations about democratizing finance, Robinhood’s entire business has been built since its inception on selling orders from its customers—known as “payment for order flow”—to the most notorious sharks in Wall Street, accounting for 70 percent of its $130 million in revenue during the first quarter.

Robinhood’s PFOF doubled to $180 million in the second quarter; at other brokerages such as Schwab and ETrade, PFOF accounts for just around 3 percent and 17 percent of revenue, respectively.

Though Robinhood has not pioneered the sale of customer orders, it differs from its rivals by charging market makers a percentage of the spread on each deal it sells, against a fixed sum (the greater the difference between the bid and the asked price, the greater the profit for Robinhood and other large firms).

This month, sources told the Journal, an agreement with the SEC is unlikely to be confirmed and Robinhood has not yet entered into formal discussions on a proposed fine.

Robinhood revealed yet another new round of funding – its third major cash infusion within the past four months – at a valuation of $11.2 billion earlier this month, amid record numbers of new customers and rumors that the company will be able to IPO later this year.

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