By 
Robinhood is reportedly facing multiple investigations by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regarding its March service outage, and, separately, 2018 disclosures relating to its revenue practices.
Reports say that according to its information from a source involved in a joint SEC/FINRA investigation of how the company handled and responded to a major service disruption in March. Separately, the SEC is reportedly looking into public disclosures of the company’s practice of selling client order flow to third-party firms.
Consumer protection agencies received more than 400 complaints against Robinhood in the first half of 2020.
Comparatively, the FTC received 126 reports for Charles Schwab, 111 for E-Trade and 69 for Fidelity over the same period of time.
Many of the complaints were regarding the March outage and how Robinhood’s failure to provide a swift resolution resulted in some investors losing thousands of dollars after being unable to close accounts.
The popular stock brokerage platform experienced an outage of its trading service on March 2 that lasted for 17 hours. Customers were unable to access their accounts and execute trades while stocks were surging higher after a period of downturn due to the coronavirus. They were also unable to reach Robinhood’s customer service for help. Though service eventually resumed, Robinhood had two additional shorter outages in March.
According to statements made by the company at that time, the March outages were the result of “stress on the app’s infrastructure,” a high volume in trading due to market volatility and a record number of sign-ups. There have been problems and outages with the service every month since March, according to Down Detector.
As Robinhood’s popularity has surged in recent months, it added 4.31 million new accounts as reported in June, and is now valued at $11.2 billion as the service has faced heavy scrutiny.
Both the SEC and FINRA have declined to confirm reports they are investigating Robinhood.
Robinhood is also facing an additional investigation by the SEC over its failure to fully disclose its practice of selling client order flow to high-speed trading firms, according to the Wall street Journal.
According to its report, Robinhood didn’t fully disclose these practices on its website until 2018. Details of its revenue model were separately disclosed in its public SEC filings, however.
Robinhood makes money in a variety of ways, although selling client order flow to third-party firms like Citadel Securities and Two Sigma Securities is a major driver of revenue. Robinhood charges market makers a percentage of the spread on each trade it sells, compared to a fixed amount—which some critics say creates a conflict of interest for the company. A bigger difference between the bid and asked price means Robinhood and other firms profit.
The investigation is “at an advanced stage,” according to the Wall Street Journal report. If Robinhood chooses to settle the investigation—which means it could walk away without admitting or denying any misconduct—the company could end up paying a fine of more than $10 million.
Comments