When Robinhood was building is pioneering Millennial trading app, it knew it would have to be bold to attract the affections of that notoriously Wall Street-averse generation. How bold? Free bold. Free everything: Free trades, free banking, free money, accidentally and for a little while.

And it worked: Robinhood’s valuation jumped sixfold in just two years, as it garnered nearly as many users as E*Trade in 23 fewer years. Even better, its success forced everyone else to give up their commissions on trades, putting a pretty serious crimp in its rivals’ revenue.

Of course, Millennials like free stuff, and it seems they also like to play around in the markets, especially when they’ve got nothing else to do. But they aren’t stupid, at least not all of them, and at least some were liable to ask, “Uh, bros, if you don’t, like, charge us for anything, how do you make any money and get a $7.6 billion valuation?” Well, Robinhood had an answer to that very question.

Robinhood had a page on its website titled “How We Make Money” that listed only two revenue sources: fees for its margin-trading service and interest collected on customer deposits.

That certainly sounded good enough to anyone who was interested, as it doesn’t seem to have hurt the brokerage’s growth. The only problem was, those two streams accounted for less than half Robinhood’s revenue. Excluded from the list were the rebates it got from executing brokers, but also the kind of thing that might make a skeptical Millennial think twice about signing up for an account: selling their trades to those shadowy and scary-sounding high-speed traders.

Unfortunately for Robinhood, disclosing conflict-of-interest-sounding sources of roughly half of your revenue is the kind of thing the SEC can be a real stickler about, and so it’s likely to have at least $10 million less to spend on fixing those suicide-inducing glitches, to say nothing of its on-the-shelf plans for global day trading domination.

Any settlement may not accuse Robinhood of intentionally violating the most serious antifraud laws, and instead allege the company should have known its statements were false or misleading, one of the people said…. The investigation, run out of the SEC’s San Francisco office, examined Robinhood’s failure to fully disclose on its website—until 2018—that it took payments from high-speed trading firms for sending them customers’ orders to buy or sell stocks or options…. The SEC enforces laws that require brokerage firms, public companies and other Wall Street players disclose all material facts that an investor would want to know to make a trading decision.

Robinhood Faces SEC Probe for Not Disclosing Deals With High-Speed Traders [WSJ]

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