The Securities and Exchange Commission scrutiny is focused on Robinhood’s disclosures prior to 2018, when the company altered its website to make information on how it earned money easier to find, said the person who asked not to be named because the review isn’t public. The SEC probe was first reported by the Wall Street Journal, which said Robinhood may pay a fine exceeding $10 million to settle the investigation.
But from the start, Robinhood made most of its money from payment for order flow, a controversial practice employed by almost all retail brokerages in which they sell customer orders to high-speed traders and other market makers. The outside firms execute the trades, earning a small profit off each transaction. Regulators have long been concerned that the transactions might not have the best interests of brokerage clients in mind.
Following questions about payment for order flow from Bloomberg in 2018, the company amended the “How We Make Money” section of its website, and published a letter from Tenev, outlining the practice. Until the letter, it was difficult to find any mention of payments for order flow on the company’s website, though it linked to required disclosures about the practice in fine print.