Retail brokerage firm Robinhood Financial did not report a particular type of stock trade it conducted for clients last year to a public data feed, according to regulatory data analyzed by Reuters and a source familiar with the matter. So-called fraction shares are offered by many brokerage firms. They let investors buy a piece of a stock instead of the whole thing, so instead of throwing away more than $ 3,000 on a share of Amazon.com Inc, an investor can buy as little as $ 1
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Brokers are required to report all their trades to trading execution facilities (TRFs) in accordance with the Financial Industry Regulatory Authority (FINRA) and US Securities and Exchange Commission rules. FINRA’s enforcement has imposed fines on other brokerage firms, including Merrill Lynch and Deutsche Bank AG’s US Securities Division, for past breaches of its reporting and supervisory rules.
According to its website, Robinhood launched its fractional stock service in December 2019, but only began publicly reporting trading executions the week of January 25, 2021, FINRA data regarding over-the-counter transactions shows. Data before then shows no trades reported by Robinhood.
Robinhood’s failure to report to a trade execution facility was confirmed by a person familiar with the company, who asked not to be identified to discuss a case that is not public.
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Reuters could not determine how many trades Robinhood did not report. As of Dec. 31, Robinhood users had $ 802.5 million in shares purchased through its fractionated stock program, the brokerage firm said in a regulatory application. Many of these purchases can be made by wholesale brokers.
A spokeswoman for Robinhood declined to comment on the reporting problem, but said the company, which had 13 million customers in November, only executes a “very small percentage of its fractional orders from its own inventory.”
A spokesman for FINRA, which works with brokerage firms, declined to comment.
When stocks are traded on stock exchanges, everyone can see the activity. But when stocks are traded over-the-counter, as is the case with Robinhood, investors rely on brokers to report the trades to the TRF. The information helps determine stock prices. When certain trades are not reported publicly, it reduces the amount of information available to market participants and it can create a disparate set of rules, says FINRA.
Still, some experts said that although the omission was serious enough to justify fines to prevent it from happening again, it was not a major setback. This is because the number of trades that were not reported would be a small fraction of the total trade, these people said.
“Should they deserve a parking ticket for it? Yes. Should it be painful enough that they do not do it again? Yes,” said James Angel, a professor of finance at Georgetown University who specializes in market structure, as Reuters presented data to him. “Should it be so overwhelming that it puts them out of action? Heck no.”
The lapse of reporting came as the company, which last month filed a first public offering, which sources told Reuters’ valuer that it was around $ 30 billion, expanded rapidly and legions of new retailers entered the market.
FINRA rules state that all trades must be reported – including trades on less than one stock – in the name of openness, as market participants can base decisions on not only understanding prices, but who trades what and when.
Unlike orders for full shares, which Robinhood sends a lot to wholesale brokers to execute, Robinhood says its clearing broker arm, Robinhood Securities, executes fractional trades from its own account, which it is licensed to do by FINRA.
Robinhood traded about 1.86 million tier-one shares during the week of March 15, and about 3.51 million tier-two shares the week of March 1, the latest FINRA data shows.
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Level 1 securities include shares of the S&P 500 Index, the Russell 1000 Index and exchange-traded products, while level two includes smaller companies.
(Reporting by John McCrank; Editing by Megan Davies and Paritosh Bansal)