Robinhood Fined $1.25M by FINRA for Customer Order Routing Method
This is the latest stumble for Robinhood, which started no-commission trading years before Schwab and others followed.
Robinhood, which lets its customers trade stocks for free, routed all trades to four securities firms that paid it for order flow, the Financial Industry Regulatory Authority said in a Thursday statement. In doing so, Robinhood didn’t consider factors such as “price improvement” that it could have obtained for clients by sending trades elsewhere, the regulator said.
(Read More: Robinhood Is Said to Get 40% of Revenue From Firms Like Citadel)
Retail brokers like Robinhood often make money from selling its customers’ orders to high-frequency trading firms, or market makers.
Robinhood also didn’t perform a systematic review of several order types such as stop and limit orders, Finra said. Robinhood didn’t admit or deny the allegations, which took place from October 2016 to November 2017. As part of the settlement, Robinhood agreed to hire an independent consultant to conduct a thorough review of its compliance practices.
“The facts on which the settlement is based do not reflect our practices or procedures today,” Robinhood said in an emailed statement. “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.”
Robinhood, which has become a Silicon Valley darling for its popularity among millennials, has had recent stumbles. In November, certain customers took advantage of a flaw that allowed them to make highly leveraged trades without putting down enough cash to back the transactions. Last December, the company botched the rollout of a new checking account by falsely saying customer deposits would be backed by the Securities Investor Protection Corp.
Retail brokers like Robinhood make money from selling its customers’ orders to high-frequency trading firms, or market makers.
–With assistance from Julie Verhage.— Related on ThinkAdvisor:
- Schwab Ends Commissions on Online and Mobile Trades
- Fidelity Joins Price War With Zero Commissions
- E-Trade Is Latest to End Online Trading Commissions
- Ally Invest Also Ending Commissions on Stock, ETF and Options Trades
- Is Free Trading at E-Trade, Schwab and TD Ameritrade Really a Boon for Investors?
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