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Robin Hood reportedly faces SEC probe over disclosure practices

It would be the popular trading app’s latest headache

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Photo (c) Sezeryadigar - Getty Images
Robin Hood, the app that made day trading popular with millennials, is reportedly facing an investigation by the Securities and Exchange Commission (SEC) regarding its disclosure practices.

The Wall Street Journal cites sources familiar with the matter who say the SEC has launched a civil fraud investigation into what it calls Robin Hood’s “early failure to fully disclose its practice of selling clients’ orders to high-speed trading firms.”

A spokeswoman for Robin Hood declined to comment specifically on The Journal report, telling media outlets, “We strive to maintain constructive relationships with our regulators and to cooperate fully with them.”

At issue is Robin Hood’s alleged failure to disclose that it did business with high-speed trading firms that purchased and executed Robin Hood users’ stock orders when they bought and sold stocks and options. The report said Robin Hood began fully disclosing that relationship on its website in 2018.

Not uncommon

Wall Street insiders say the practice of selling orders is not uncommon, though it is considered somewhat controversial. The debate, however, centers on whether it creates a conflict of interest since the high-speed trading firms have access in a split second to what stocks are being bought and sold.

The Journal report cites some who say the practice could allow big Wall Street traders to exploit individual investors, but others who work on Wall Street say that doesn’t happen.

Growing pains

Robin Hood, founded in 2013, recently emerged as a major force in online trading and introduced a new generation to stock trading because it is easy to use and does not charge a commission on trades. In 2019, its business model forced the other more established trading platforms, such as Charles Schwab and TD Ameritrade, to also adopt commission-free trading.

But the company has had its share of growing pains, and an SEC fraud investigation would be just the latest headache for the popular app. 

In March, when the stock market reacted violently to the economic shutdown caused by the coronavirus (COVID-19) pandemic, Robin Hood’s trading platform crashed on three of the market’s most volatile days, preventing users from buying or selling.

The current issue appears to hinge on disclosure, and not whether the action was harmful to users. The Journal report notes that the practice of a broker selling orders to a high-speed trader for execution is not illegal, and the SEC itself has determined that it often results in slightly better purchase and sale prices for individual investors.

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