How much did Robinhood pay for order flow, and was it a violation of securities laws and customer agreements?

That’s the question regulators have vowed to answer as an increasing number of customers have sued the company, claiming Robinhood violated their contracts and its own fiduciary duty after halting trades on frenzied stocks. The trading app earned the ire of both Washington, D.C., and Wall Street critics after it unexpectedly restricted purchases of GameStop Inc. and other hot stocks after online speculators caused the stocks’ prices to surge.

The Securities and Exchange Commission, the Financial Industry Regulatory Authority and at least two congressional panels are looking into the matter, as the number of customer lawsuits grew to 30 on Thursday.

The public outcry centered on the theory that Robinhood blocked purchases of GameStop and other stocks in order to benefit Citadel Securities—a sister to the hedge fund Citadel and one of Robinhood’s largest sources of revenue. Robinhood, however, claims it halted the frenzied trading in some stocks to reduce its own risk of running out of capital: As the volume of margin trades for GameStop, the gaming merchandise company, and other stocks rose, Robinhood was getting margin calls from its clearinghouse.

“It’s Robinhood’s regulatory requirement to protect their balance sheet” and halt trading, said D.R. Barton, a veteran Baltimore-based technical trader. “I think the way they did it was a bit blunt and ham-handed, but they were getting their own margin calls from the clearinghouse saying: ‘You don’t have enough money for all the stock your people are buying.’”

Citadel Securities said in a statement last week that it had “not instructed or otherwise caused any brokerage firm to stop, suspend or limit trading or otherwise refuse to do business.”

But with Robinhood CEO Vlad Tenev scheduled to testify before the House Financial Services Committee, and Treasury Secretary Janet Yellen holding a meeting with top federal regulators to address last week’s events, a deeper dive into Robinhood’s relationship with Citadel Securities is likely. That could force the SEC and Finra to take a hard look at the firm’s payment for order flow arrangements—in which trading firms pay Robinhood for the privilege of executing investor trades.

The SEC and Finra have allowed these payments for years. But veteran traders and securities experts say that with new regulatory agencies and Congress led by Democrats, it will be tougher to reconcile these payment arrangements with regulations that require firms to find the best prices for retail client trades.

In a series of tweets over the weekend, renowned venture capitalist Bill Gurley zeroed in on the practice in a series of tweets, and he told the SEC it “creates an obvious and substantial conflict of interest between broker-dealers and their customers.”

According to one former SEC lawyer, the practice is long held and perfectly legal. Nevertheless, it may become more odious as Congress and the Biden administration pressure regulators and firms to further reduce conflicts of interests.

Carl Levin, the former U.S. senator, held hearings into the practice in 2014 and asked the SEC to ban the payment arrangements.

He still believes the practice should be rooted out. The SEC “needs to stop brokers from accepting payments for routing their customers’ orders to certain traders and exchanges,” said Levin, a Michigan Democrat, in a Financial Times op-ed last month.

“It is like paying a hidden, private tax on savings whether someone invests through a large mutual fund or directly through a personal brokerage account,” Levin wrote.

Since the 2014 hearings, Finra has done targeted exams and found that some broker-dealers didn’t have or use a system allowing them to analyze their orders and ensure clients were getting the best execution and price.

Robinhood settled with the SEC in December after the agency charged the firm with making misleading statements about its order routing payments. The SEC alleged that some of the firm’s customers were not given the best price on their orders—a failure that allegedly cost investors $34 million more than they would have paid for the $5 per trade commissions other brokers charged from 2015 to 2018.

Robinhood settled without confirming or denying the SEC’s charges, saying the “settlement relates to historical practices that do not reflect Robinhood today,” and that it had reconfigured its routing practices to ensure best execution.

If regulators press ahead with new rules curtailing order-routing payments, many broker-dealers could wind up bringing their market-making activities in-house.

We “ultimately think many of these companies would look to bring market-making activities in-house, like Fidelity and some others,” said JMP Securities analyst Devin Ryan in an e-mail to investors this week. “It would take some time to set up, but we think there is too much at stake, and internalizing trading would be one allowable solution that could drive a rush to build or buy market-making functionality.”

For technical trader Barton, it was a tough lesson for newer investors, but not one that appears to break securities laws. “This is really about new traders learning how the system works. It happens every big bubble,” Barton said.