Robinhood Fined $1.25 Million by FINRA for Best-Execution lapses
A Wall Street Regulated fined Robinhood this week to the tune of $1.25 million after it was found to have re-routed non-directed equity orders from its customers to four other broker dealers as way to pay for those orders.
The fine, which was levied in the form a civil action, was resultant on their customers not receiving the best price and for Robinhood’s failure to supervise the process properly. The Financial Industry Regulatory Authority (FINRA), which is the largest regulator that operates independently within the United States for firms involved in securities, stated the case came as a result of an arrangement between October 2016 and November 2017. that is known within the industry as a ‘payment for order flow’ between
This practise, seen as controversial, is a substantial part of Robinhood’s business. It involves selling its customers trades to other firms, in this case, four other firms. This practise earned the company an estimated $70 million over the course of last year. Rules regulating the industry stipulate that brokerages must be diligent to ensure that their customers and their trades receive the best possible price based on current market pricing. That duty is clearly stated in FINRA Rule 5310, a rule that acts as a standard for companies and how to best execute deals.
Robinhood’s No-fee model Generated 10 million users
The Financial Industry Regulatory Authority further elaborated that the company failed to reviews to ensure it provides the best systematic best execution on multiple orders that came in during non-regular business hours. The result of their failing to do so saw hundreds of thousands of monthly orders not being reviewed properly.
Speaking on the settlement with the FINRA, Robinhood stated: “The facts on which the settlement is based do not reflect our practices or procedures today. The agreement relates to a historic issue during the 2016-2017 timeframe involving consideration of alternative markets for order routing, internal written procedures, and the need for additional review of certain order types. 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.”
Based on the most recent metrics, Robinhood has generated over 10 million users, more than twice what is had in the previous year and saw its evaluation increase by $7.6 billion from its value in 2018. The company’s commission free stock trading model has been it most successful method for generating new customers, especially millennials and that saw pressure being applied to major brokerages in an attempt to catch up with the model of eliminating fees.
Currently, Robinhood has been permitted to retain that model with certain adjustments that include not operating physical locations or spending large amounts on promotional campaigns.