Robinhood Markets Inc. is on a collision course with regulators over a controversial practice that generates most of its revenue, as the online brokerage gears up for a highly anticipated initial public offering.

In its IPO filing, released Thursday, Robinhood disclosed that 81% of its first-quarter revenue came from sending its customers’ stock, options and cryptocurrency orders to high-speed trading firms—a practice known as payment for order flow.

Payment for order flow, or PFOF, makes it possible for Robinhood to let customers place trades with no upfront commission payment. Zero-commission stock trades helped the company win over millions of younger, less affluent customers and are now standard practice at many of Robinhood’s competitors.

Payment for order flow critics—including the country’s top market regulator, Securities and Exchange Commission Chairman Gary Gensler —are wary of the practice. They argue that it poses a conflict of interest for brokerages, because the brokers can either collect more money for selling their customers’ order flow or pass that money on to customers in the form of price savings on their trades. Last month, Mr. Gensler said the SEC was reviewing payment for order flow, fueling speculation among some market observers that PFOF could be banned.

“The entire business model of some brokers is in the crosshairs,” said Tyler Gellasch, executive director of Healthy Markets Association, an investor trade group.

The trading mania in meme stocks such as GameStop raised concerns at the SEC and in Congress about the handling of investors’ orders.

The trading mania in meme stocks such as GameStop raised concerns at the SEC and in Congress about the handling of investors’ orders.

Photo: nick zieminski/Reuters

Payment for order flow shot to the top of the SEC’s agenda after the trading frenzy in stocks such as GameStop Corp. earlier this year. The meme-stock mania prompted a series of congressional hearings on how retail brokerages like Robinhood handle investors’ orders, which came just as Mr. Gensler emerged as President Biden’s choice to lead the SEC.

In a June speech, Mr. Gensler questioned whether brokers accepting PFOF were fulfilling their duty to provide best execution to customers. He also voiced concern that routing small investors’ orders to trading firms could undermine the quality of public market data provided by stock exchanges that miss out on much of individual investors’ activity.

Mr. Gensler has noted during several recent speeches that payment for order flow is illegal in some countries, such as the U.K. Some Democrats on Capitol Hill have also backed prohibiting payment for order flow.

Still, the SEC hasn’t given any indication of how it might change its rules on payment for order flow. Prohibiting PFOF might force some brokerages to abandon zero-commission trading, which could lead to an outcry as small investors face the prospect of paying for trades again. That would undermine arguments that banning PFOF would help investors. Many of the potential benefits of such a change—such as possibly increased activity on transparent public exchanges—wouldn’t be as tangible to ordinary investors.

An SEC spokesman declined to comment.

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Following the GameStop trading frenzy, the SEC is expected to take a fresh look at payment for order flow, a decades-old practice that is at the heart of how commission-free trading works. WSJ explains what it is, and why critics say it’s bad for investors. Illustration: Jacob Reynolds/WSJ The Wall Street Journal Interactive Edition

Robinhood acknowledged in its IPO filing that a ban on payment for order flow would hurt its business.

“There is no guarantee that the SEC, other regulatory authorities or legislative bodies will not adopt additional regulation or legislation relating to PFOF practices…including regulation that could substantially limit or ban such practices,” Robinhood said.

Moreover, because Robinhood leans more heavily on PFOF than other brokerages, banning payment for order flow could have an “outsize impact” on Robinhood, the company added.

In some ways, Robinhood is pursuing the same path as other fast-growing startups that went public despite regulatory uncertainty over their business models, such as Uber Technologies Inc. and Coinbase Global Inc.

Payment for order flow has existed for decades. The SEC has reviewed the practice several times and allowed it to continue, despite occasional flare-ups of controversy. To date, the regulator has accepted the argument put forward by many brokers and traders: that sending retail orders to high-speed traders benefits small investors. Proponents of PFOF say investors save money when their orders are routed to such trading firms, compared to what they would get at exchanges such as the New York Stock Exchange or the Nasdaq Stock Market.

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Many of Robinhood’s rivals accept PFOF, too, but the other major U.S. brokerages tend to rely more on other revenue streams, such as collecting interest on customers’ cash balances. Charles Schwab Corp., for instance, reported that 6% of its net revenue last year came from selling order flow.

A Robinhood spokesman declined to comment beyond what the company wrote in its IPO prospectus, citing the pre-IPO quiet period. The company said last month that it looked forward to working with the SEC as the regulator considered changes to the current U.S. market structure, which it said was working well for investors.

Some industry veterans say Robinhood will survive the SEC’s review. Even if new regulations curtail the company’s PFOF revenue, Robinhood could find other ways to make money from its vast customer base, said Jamie Selway, chairman of retail-brokerage startup All of Us Financial Inc.

“They have 18 million relationships, which is huge,” he said, citing the company’s reported number of funded accounts. “There are other levers they could pull.”

Robinhood has already clashed with regulators. In December, it paid $65 million to settle SEC allegations that it misled customers about its use of payment for order flow and that it failed to satisfy its best-execution duty. Last week, Robinhood paid nearly $70 million to resolve a range of allegations from the Financial Industry Regulatory Authority, including some stemming from technology failures that left millions of customers unable to trade.

In both cases, Robinhood neither admitted nor denied wrongdoing.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com