‘Flash Boys’ Led Robinhood Founders to Hide How Firm Made Money

Robinhood Markets became ubiquitous through a popular app that prompted millions of investors to start trading stocks. But unknown until now is that the brokerage feared author Michael Lewis’s seminal take down of high-speed traders might derail the business before it even got off the ground.

The revelation is buried in a Thursday Securities and Exchange Commission enforcement action that accused Robinhood of hiding for years how it made the bulk of its revenue: selling client orders to Wall Street securities firms. The company decided to obscure that fact after “Flash Boys,” Lewis’s 2014 book, portrayed it as questionable conduct that can hurt mom-and-pop investors.

‘Flash Boys’ Led Robinhood Founders to Hide How Firm Made Money

The SEC, which fined Robinhood $65 million, doesn’t mention Lewis or “Flash Boys” by name. But the regulator does detail how a “best-selling author” labeled various aspects of lightning-fast trading as “controversial.” The book, along with widespread criticism of electronic markets, prompted Robinhood to remove references to selling client orders from a section of its website that explained how the firm made money, the SEC said.

“The settlement relates to historical practices that do not reflect Robinhood today,” Dan Gallagher, the firm’s chief legal officer, said in a statement. “We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.”

At issue is a practice known in the industry as payment for order flow that is employed by almost all retail brokerages. Critics argue that it’s riddled with conflicts that enable high-speed traders and other firms to profit by taking advantage of small-time investors. But defenders say it improves prices for customers on the vast majority of trades.

Indeed, Robinhood’s immense popularity stems in large part from the fact that it offers clients free trades, a strategy that competitors have copied.

Following Lewis’s book, Robinhood added a new section to its website in December 2014 that said its revenue from payment for order flow was “negligible” and that it would inform customers if that changed. It turned out that in 2015 through mid-2016, the practice accounted for 80% of the company’s revenue, according to the regulator. The firm settled the SEC case without admitting or denying wrongdoing.

In October 2018, Robinhood started prominently disclosing that almost half its revenue came from payment for order flow.

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