In brief

  • Robinhood Markets Inc. is reportedly being investigated by the Securities and Exchange Commission.
  • The investigation centers on whether the company informed its traders that their orders were being sold to another firm to be executed.
  • The Wall Street Journal reports that the fine could be greater than $10 million.

Robinhood Markets Inc., the company behind the crypto-friendly Robinhood app, is the subject of a civil fraud investigation, according to a Wall Street Journal report.

At issue is the company’s apparent failure to tell clients it was selling their buy and sell orders to high-speed trading firms. Such firms pay Robinhood to actually execute trades from Robinhood’s customers, who are typically layman day traders, not high-rollers.

The Journal notes that Robinhood could pay more than $10 million in fines to settle the Securities and Exchange Commission investigation, but that any deal likely won’t happen this month.

The company told WSJ, “We strive to maintain constructive relationships with our regulators and to cooperate fully with them.”

According to earlier reporting from Bloomberg, high-speed trading firms paid Robinhood about 1.7 cents for every share traded from April through June. Since the firms are market makers, they in turn make money by charging a spread on each trade, not dissimilar to how a casino might take a cut on sports betting.

Robinhood could theoretically execute these trades itself, but some allege that selling them to a speed trader is a way of using computer algorithms to squeeze money out of ignorant investors. (One counter-argument is that traders might get a better wholesale price and actually save money.)

In addition to allowing users to trade stocks, the Robinhood app enables users to trade Bitcoin, Ethereum, and a handful of other cryptocurrencies. 

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Robinhood has done big business despite the coronavirus pandemic. In August, it announced that it was valued at $11.2 billion; the month before, it was valued at $8.6 billion. 

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