© Reuters. The Robinhood App is displayed on a screen
By John McCrank
NEW YORK (Reuters) – Retail broker Robinhood Financial has not reported to a public data feed a certain type of stock trading it conducted for customers over the past year. This is evident from regulatory data analyzed by Reuters and a source familiar with the matter.
So-called fractional shares are offered by many brokers. They let investors buy a piece of a stock instead of the whole thing. Instead of spending more than $ 3,000 on a share of Amazon.com Inc (NASDAQ :), an investor can only buy $ 1 in value.
Brokers are required to report all of their trades to Trade Execution Facilities (TRFs) as required by the Financial Industry Regulatory Authority (FINRA) and the US Securities and Exchange Commission. FINRA enforcement has fined other brokers, including Merrill Lynch and the US securities division of Deutsche Bank AG (NYSE :), for violating their reporting and regulatory rules in the past. LINKS: https: //
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Robinhood started its fractional stock service in December 2019, according to its website, but did not publicly report any trade executions until the week of January 25, 2021, according to FINRA data on over-the-counter transactions. The previous data shows no trades reported by Robinhood.
Robinhood's lack of reporting to a trade execution facility was confirmed by a person familiar with the company, who asked not to be identified in order to discuss a matter that is not public.
Reuters could not determine how many trades Robinhood had not reported. As of December 31, Robinhood users held $ 802.5 million of shares that were purchased through the fractional share program, the broker said in a filing for approval. Many of these purchases may have been made from wholesale brokers. A Robinhood spokeswoman declined to comment on the reporting problem, but said the company, which had 13 million customers as of November, only executes a "very small percentage of its partial orders from its own inventory".
A spokesman for FINRA, which oversees brokers, declined to comment.
When stocks are traded on exchanges, everyone can see the activity. However, when stocks are traded over-the-counter, as is the case with Robinhood, investors rely on brokers to report trades to the TRF. The information helps determine stock prices. Failure to publicly report certain trades will reduce the amount of information available to market participants and could lead to an uneven playing field, according to FINRA. However, some experts said that while the omission was serious enough to warrant fines to prevent it from recurring, it was not a fatal error. This is because the number of unreported trades would be a small fraction of the total trade, these people said.
"Should they deserve to get a parking ticket for it? Yes. Should it be painful enough not to do it again? Yes," James Angel, a finance professor at Georgetown University who specializes in market structure, told Reuters that presented data to him. "Should it be so overwhelming that it'll put you out of business? Shit, no."
The reporting error came when the company, which went public last month, valued roughly $ 30 billion, according to Reuters sources, expanded rapidly and launched legions of new retailers.
According to FINRA rules, all trades – including trades with less than one stake – must be reported in the name of transparency, as market participants may make decisions based on understanding not just prices, but who is trading what and when. Unlike orders for full shares, which Robinhood sends en masse to wholesale brokers for execution, Robinhood, according to its clearing brokerage branch, Robinhood Securities, carries out partial trades from its own account for which it is licensed by FINRA.
Robinhood executed around 1.86 million tier one shares in the week of March 15 and around 3.51 million tier two shares in the week of March 1, according to the latest FINRA data. Tier One stocks include Russell 1000 index stocks and exchange traded products, while Tier 2 stocks include smaller companies.