NEW YORK, April 8 (Reuters) - Retail brokerage Robinhood
Financial did not report a certain type of stock trade it
executed for customers last year to a public data feed,
according to regulatory data analyzed by Reuters and a source
familiar with the matter.
So-called fractional shares are offered by many brokerages.
They let investors buy a slice of a share instead of the whole
thing, so rather than forking out more than $3,000 on a share of
Amazon.com Inc, an investor can buy as little as $1
worth.
Brokerages are required to report all their trades to trade
execution facilities (TRFs), according to Financial Industry
Regulatory Authority (FINRA) and U.S. Securities and Exchange
Commission rules. FINRAs enforcement has fined other
brokerages, including Merrill Lynch and Deutsche Bank AG's
U.S. securities division, for violations of its
reporting and supervisory rules in the past. LINKS: https://bit.ly/39Ni0bC
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Robinhood launched its fractional share service in December
2019, according to its website, but only began publicly
reporting trade executions the week of Jan. 25, 2021, FINRA data
relating to over-the-counter transactions show. Data before then
does not show any 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 failed
to report. As of Dec. 31, Robinhood users held $802.5 million in
shares bought through its fractional share program, the
brokerage said in a regulatory filing.
A spokeswoman for Robinhood, which had 13 million customers
as of November, confirmed that the "vast majority" of the
fractional shares purchased through its platform were executed
by wholesale brokers, who would have reported those trades.
Robinhood only executes a "very small percentage of its
fractional orders from its own inventory," the spokeswoman said.
A spokesman for FINRA, which polices brokerages, declined to
comment.
When stocks trade on exchanges, everyone can see the
activity. But when stocks trade over-the-counter, as is the case
with Robinhood, investors rely on brokers to report the trades
to the TRF. The information helps determine share prices.
When certain trades are not publicly reported, it diminishes
the amount of information available to market participants, and
could create an unlevel playing field, FINRA says.
NOT A MAJOR LAPSE
Still, some experts said that while the omission was
sufficiently serious to warrant fines to keep it from happening
again, it was not a major lapse. Thats because the number of
trades that went unreported would be a small fraction of the
overall trading, these people said.
"Should they deserve to get a parking ticket for it? Yes.
Should it be painful enough that they dont do it again? Yes,"
said James Angel, finance professor at Georgetown University who
specializes in market structure, when Reuters presented the data
to him. "Should it be so overwhelming that it puts them out of
business? Heck no."
The reporting lapse came as the company, which last month
filed for an initial public offering that sources told Reuters
values it at around $30 billion, was expanding rapidly and
legions of new retail traders were entering the market.
FINRA rules state that all trades have to be reported -
including trades of less than a share - in the name of
transparency, since market participants may base decisions 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 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 executed around 1.86 million tier-one shares
during the week of March 15, and around 3.51 million tier-two
shares the week of March 1, the latest FINRA data show.
Tier-one securities include stocks in the S&P 500 Index, the
Russell 1000 Index, and exchange-traded products, while tier-two
includes smaller companies.
(Reporting by John McCrank; editing by Megan Davies, Paritosh
Bansal and Bill Berkrot)