Robinhood executives withheld details of how the app is making money, SEC says

• Robinhood bosses withdrew information about how the company made money after learning about a bestselling book that described how its practices could harm inexperienced investors, according to an SEC complaint.
• The company stopped revealing how he made money from trading after Michael Lewis’ 2014 talk on high frequency trading in a book called “Flash Boys”.
• The SEC describes how “a best-selling author published a book” that describes order payments to high-speed trading companies as controversial.
• Robinhood agreed to pay $ 65 million to settle SEC charges that misled clients.
• Visit the Business Insider homepage for more stories.

Senior Robinhood executives withheld information on how the trading app is making money after the release of Michael Lewis’ “Flash Boys” in 2014, which details how the stock market is influenced by high traders. frequency, has sparked controversy around its business model, a complaint from the Securities and Exchange Commission said.

The complaint is part of an SEC enforcement action that accuses Robinhood of misrepresenting and omitting information about its sources of income, particularly from selling securities to Wall Street brokerage houses . These payments are also referred to as “order flow payment”.

Like other brokerage firms, Robinhood sells its orders to high-speed trading firms for execution. But it masked the fact that order flow payment has been its main source of revenue since launching in 2015, the SEC said.

According to the complaint, Robinhood deliberately omitted the source of revenue to avoid customers believing that the payment for the order flow is controversial.

The SEC does not mention Michael Lewis or “The Flash Boys,” but does state that a “best-selling author has published a book” which describes payment for order flow as controversial and provides insight into e-commerce in securities.

Read more: JPMorgan says stocks are poised for lasting gains like they haven’t been in years – and identifies 43 names to buy for above-average earnings growth in 2021

Robinhood’s senior staff were aware of the book and the controversial payment linked to popular trading companies, prompting them to remove references from its response to an FAQ section on “How Robinhood Makes Money,” reported said the SEC.

A new FAQ page dealing with brokerage payment was created, but said its revenue from payment for order flow was “indirect” and “negligible,” according to the complaint. Robinhood also said it will let customers know if this becomes a significant source of income.

It became evident to the SEC that 80% of Robinhood’s revenue from 2015 to mid-2016 came from order flow payment. Robinhood agreed to pay $ 65 million to settle the SEC’s charges.

“The settlement relates to historical practices that do not reflect Robinhood today,” said Dan Gallagher, chief legal officer at the firm.

A Robinhood spokesperson told Business Insider: “We are fully transparent in our communications with our clients on our current revenue streams, have significantly improved our best execution processes and have established relationships with other market makers. to improve the quality of execution. “

Robinhood began disclosing that almost half of its revenue comes from the checkout process for Order Flow in October 2018.

Read more: Buy these 26 stocks on the verge of skyrocketing as China begins to dominate EV landscape, says UBS