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Stock trading app Robinhood’s controversial practice of selling customer orders to market makers is under new scrutiny. This week, Securities and Exchange Commission chair Gary Gensler said a ban was “on the table”. The company may have to lean more on its lesser-known business in so-called proxy rebates.
US public companies and funds are required to pay banks and brokerages to deliver stockholder documents such as prospectuses and proxy materials. Most outsource the job to third parties such as Broadridge Financial or Computershare. However, Robinhood also receives a fee — the proxy rebate — for providing information to compilers of stockholder documents.
While it does not break out how much it earns from proxy rebates, listing documents recorded $61m in “other revenues” last year.
Soon, Robinhood will want more than just a cut of the pie. Last month it announced a $140m acquisition of Say Technologies, maker of shareholder voting and communications software.
Say will allow Robinhood to launch its own in-house shareholder services. It is a booming business. Market leader Broadridge made close to $5bn in revenue in the last financial year.
The industry thrives on volume. More shareholders investing in more stocks means more proxies to mail out and more fees to collect.
Robinhood, whose no-commission trading app helped to fuel the rise of retail investing during the pandemic, now boasts 22m funded accounts. It is uniquely well placed to take advantage of the trend.
But Robinhood’s practice of giving users free shares when they open an account or refer friends has irked smaller companies that have seen a surge in the number of people holding their stocks. They rightly complain about being saddled with far larger payments than necessary for proxy communications. The case for a conflict of interest could arise if Robinhood ends up billing the same companies that it helps investors trade in.
Getting into the investor communications business could be lucrative. It could also create a whole new set of regulatory headaches.
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