According to data found by global news organisation Reuters, Robinhood Financial failed to report fractional share OTC trades conducted on behalf of their customers. Its failure to report certain OTC trades to public data feeds last year is set to land the brokerage company in more controversy. It is mandatory to disclose all trade, as dictated by official regulatory bodies. Both FINRA and U.S. Securities and Exchange Commission rules state that this is necessary in order to guarantee complete transparency.
Offered by a number of brokerages, ‘fractional shares’ allow investors to purchase just a portion of a share rather than the entire product. This means that investors could buy shares in giants such as Amazon for as little as $1, as opposed to parting with a significant amount of cash for the share.
According to its website, Robinhood first launched its fractional share offering back in December 2019, but FINRA data showed that the brokerage only attempted to publicly report trade executions the week commencing January 25, 2021. Any data pre-dating those dated does not show any relevant trades to have been reported by Robinhood.
The Financial Industry Regulatory Authority has been known to fine brokerages in the past for failing to report such transactions, including Deutsche Bank’s U.S. securities branch and Merrill Lynch. Regulatory filings eventually revealed that retail investors with Robinhood held a total of $802.5 million in fractional shares. These filings were divulged at the end of 2020, though Reuters was not able to verify just how many trades Robinhood failed to report.
When Reuters presented data to James Angel, finance professor at Georgetown University who specialises in market structure, he said:
Should they deserve to get a parking ticket for it? Yes. Should it be painful enough that they don’t do it again? Yes. Should it be so overwhelming that it puts them out of business? Heck no.
This reporting lapse was revealed just as the company was seen to be expanding significantly and at a rapid pace, with legions of new retail traders beginning to enter the market. Just last month, Robinhood filed for an initial public offering that Reuters has said to be valued at around $30 billion.
Earlier in March, Robinhood filed confidentially for initial public offering (IPO). The online brokerage submitted a draft registration statement on Form S-1 with the Securities and Exchange Commission for IPO.
Robinhood recently appointed former Google executive Aparna Chennapragada as Chief Product Officer.
