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January 25th, 2023
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Robinhood got fined for the way it handled “commission free” trades
Quartz | John Detrixhe | Dec 19, 2019
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.
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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.
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