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Robinhood faces SEC investigation over deals with high-speed trading firms: Rpt

According to a recent report, Robinhood faces a civil fraud investigation over its early failure to fully disclose its practice of selling clients’ orders to high-speed trading firms. Yahoo FInance’s Jared Blikre joins The Final Round panel to discuss.

Video Transcript

SEANA SMITH: I mean, the big debate, I guess, going back the past couple of months has been how much has the retail investor had to do with his rally? How much do they have to do with the massive gains that we've seen over the last couple of months? And, of course, the Robinhood trading app-- that has become a favorite here amongst many retail investors. And we actually got some breaking news regarding Robinhood within the last hour or so.

Jared Blikre joins us now with a little bit more on this. And Jared, from my understanding, Robinhood is now facing an SEC probe over its high-speed trader deals. What can you tell us at this point?

JARED BLIKRE: Yeah, so just a little bit of background, Robinhood sells its order flow-- those are its customers' orders-- to firms like citadel, Sigma Two, Virtu Financial is another big one, and maybe one or two others. And they get compensated nicely for that. That's a huge part of their revenue. So now they're facing an SEC civil fraud investigation over their failure to fully disclose practice of selling clients' orders to some of these high-speed trading firms. This is coming by the way of Dow Jones.

And it's supposed to be in the late stages of the investigation. So sources are saying Robinhood could face a fine as high as $10 million. And this is a firm that was founded by two guys who got their start really, cut their teeth at the high-frequency trading desk in Wall Street. So they know the ins and outs.

And some have even speculated that they designed the Robinhood product to extract the maximum revenue. Because the Robinhood traders' orders are more valuable than just about anybody else's. They tend to be concentrated in smaller, more volatile stocks. And those are the stocks that pay more when they sell their order flow.

And in addition, there's some other factors that people talk about when they-- when Robinhood joins the discussion. There's a lot of pejoratives about the traders. And I'm not going to make any statement like that. I think anybody getting into the market now and trying to learn about stocks is a great thing.

But this is a probe into maybe not disclosing to their customers that their order flow is going to be sold. It's not weighing on the merits of whether that's right or wrong. But if there's a disclosure issue and they face a $10 million fine, could see some investor lawsuits as well.

SEANA SMITH: Yeah, certainly interesting. And we also want to bring up the fact that I think it was about a week ago that Robinhood made the announcement that they're bringing on two new chief compliance officers as they deal with some of these complaints from not only investors, but then also, of course, that regulatory scrutiny that we're talking about today.