Robinhood, famous for offering zero-commission stock trading, was fined in the US for failing to make sure its customers were getting the best deal on their orders.
The six-year-old company was fined $1.25 million by the Financial Industrial Regulatory Authority (FINRA), a self-regulatory organization. FINRA said in a statement that the brokerage failed to make sure clients were getting the most favorable prices possible from October 2016 to November 2017. Robinhood neither admitted nor denied the charges.
The amount of the fine is a minor annoyance for a company that recently raised $323 million and was valued at more than $7 billion. However, it will stoke the debate over whether “no-fee” brokerage and other financial services are as good a deal for customers as they may appear.
Robinhood has more than 10 million users and sparked a price war in the US with by offering trading without commissions. Instead, one of the ways Robinhood makes money by selling customer orders to high frequency trading firms.
Selling orders to trading firms—known in the industry as payment for order flow—is controversial because it can be difficult for clients to know if they are getting a good price on the assets they buy and sell. (Brokers like Charles Schwab and others also make money from payment for order flow.) Professional trading firms buy the retail-investor orders from the broker and execute the trades for them. These trading outfits typically make money from the gap between the bid and the offer. When trading companies buy order flow, they give some of that money (the rebate) to the brokerage that provided the orders. (You can read more about how it works, and the concerns, here.)
Some watchdogs also think paying for order flow could create conflicts of interest. A broker may be tempted to send trades to the market maker that offers it the best rebates, instead of getting the best trade execution for the customer.
FINRA says Robinhood sent its customers’ trades to four broker dealers that paid it for the orders, and that the company didn’t consider other venues that may have offered a better deal for its clients. The organization says Robinhood didn’t systematically review certain order types (an instruction about how and when to make a trade) that were used outside of normal trading hours, while also disregarding some order types. The written supervisory procedures for making sure Robinhood received the best trade execution possible for customers were inadequate, FINRA said.
“Best execution of customer orders is a key investor protection requirement,” said Jessica Hopper, acting head of FINRA’s department of enforcement.
Robinhood, as part of the settlement, agreed to retain an independent consultant to perform a comprehensive review of its systems and procedures related to best execution. A spokesperson for the brokerage said issues described in the settlement do not reflect how the company operates today. “The agreement relates to a historic issue during the 2016-2017 timeframe,” the spokesperson said. “Over the last two years, we have significantly improved our execution monitoring tools and processes relating to best execution, and we have established relationships with additional market makers.”
The fine may also complicate Robinhood’s plans in the UK, where it plans to offer services next year. British regulators have signaled deep skepticism about payment for order flow. Robinhood’s UK customer orders will be routed to the US and executed in the same way as those from its American users.