Robinhood, the app that enables users to buy stocks without paying a commission, is facing a $10m fine for not disclosing deals with high speed trading firms.

Robinhood earned $270m in the first half of 2020 in what’s called “payment for order flow”. It’s a kickback from high speed trading firms to brokers such as Robinhood for first access to their customers’ orders.

These payments are controversial as they may create conflicts of interest for Robin Hood. They could also explain why Robinhood makes more money for equity trade compared to its peers. Take a look:

Daily average revenue trades, June 2020

Robinhood 4.3m

TD Ameritrade 3.8m

Charles Schwaab 1.8m

E Trade 1.1m

With revenue linked to selling order flow, Robinhood is obliged to get its younger users addicted to trading.

Robinhood pushes trading with quick, one-click trading and visual cues such as falling confetti and emoticon-filled phone notifications that are designed to make trading look like a game. And it works.

Robin Hood users traded 40 times as many shares as Charles Shwaab customers in the first quarter of 2020.

Robinhood Users also bought more risky Options – 88 times as many Options as Charles Shwaab customers for example.

Given that most financial advisers tell stock buyers to minimize trades, this sky high frequency of day trading amongst inexperienced customers is likely to end badly.

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