TJ Kirkpatrick / Getty Images
- Robinhood bosses have removed information about how the company made money after learning of a best-selling book that describes how its practices can affect inexperienced investors, according to a SEC complaint.
- The company stopped revealing how made money from trades after Michael Lewis’ 2014 presentation on high-frequency trading in a book called “Flash Boys”
- The SEC describes how “a best-selling author published a book” that describes payments from orders to high-speed firms as controversial.
- Robinhood agreed to pay $ 65 million to settle SEC fees that misled customers.
- Go to the Business Insider homepage for more stories.
Robinhood executives have been hiding information about how the trading app is making money after Michael Lewis’ “Flash Boys” launch in 2014, detailing how the stock market is influenced by high-frequency traders, has sparked controversy over its business model, a complaint by the Securities and Exchange Commission said.
The lawsuit is part of an SEC enforcement action that accuses Robinhood of misrepresenting and omitting information about its sources of revenue, particularly the sale of securities to Wall Street brokerages. These payments are also known as ‘order flow payment’.
Like other brokerages, Robinhood sells its orders to high-speed trading companies for execution. But he masked the fact that payment for the order flow was his only major source of revenue since its launch in 2015, the SEC said.
According to the complaint, Robinhood deliberately omitted the source of revenue to avoid customers believing that payment for the order flow is controversial.
The SEC does not mention Michael Lewis or “Flash Boys,” but says “a best-selling author has published a book” that describes payment for order flow as controversial and provides information about electronic securities trading.
Read more: JPMorgan says stocks are ready for sustained gains in a way they haven’t for years – and identifies 43 names to buy for above-average earnings growth in 2021
Robinhood senior staff were aware of the book and the controversial payment associated with popular commercial firms, prompting them to remove references from their answer to a FAQ section on “How Robinhood Makes Money,” the SEC said.
A new FAQ page was created that discussed the payment of brokerage, but said that its revenue from payment for the order flow was “indirect” and “negligible”, the complaint said. Robinhood also said it will inform customers if this will ever become a significant source of revenue.
The SEC has made it clear that 80% of Robinhood’s revenue from 2015 to mid-2016 comes from payment for order flow. Robinhood has agreed to pay $ 65 million to settle SEC expenses.
“The settlement refers to historical practices that do not reflect Robinhood today,” said Dan Gallagher, the firm’s legal director.
A Robinhood spokesman told Business Insider: “We are fully transparent in our communications with clients about our current revenue streams, we have significantly improved the best execution processes and we have established relationships with additional market factors to improve quality of execution ”.
Robinhood has begun revealing that almost half of its revenue comes from the order flow payment process in October 2018.
Read more: Buy these 26 stocks ready to grow as China begins to dominate the electric vehicle landscape, says UBS