FINRA Fines Robinhood $1.25 Million for Best Execution Violations

FINRA - Execution ViolationsRobinhood, the U.S.-based financial app that offers people the ability to invest in stocks, ETFs, and options as well as crypto-trading through Robinhood Crypto, was fined $1.25 million for best execution violations related to its customers’ equity orders and related supervisory failures that spanned from October 2016 to November 2017.

FINRA found that for more than a year, Robinhood—which offers its customers the ability to trade in equity securities without being charged commissions—routed its customers’ non-directed equity orders to four broker-dealers, all of which paid Robinhood for that order flow. This arrangement is known in the brokerage industry as payment for order flow.

As part of the settlement, Robinhood also agreed to retain an
independent consultant to conduct a comprehensive review of the firm’s
systems and procedures related to best execution.

FINRA-regulated firms are required to use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. FINRA claims Robinhood failed to do that as the firm’s Best Execution Committee materials focused only on the execution quality of its pre-existing routing destinations, all of which paid Robinhood for that order flow.

The regulator also claims that the firm did not perform systematic best execution reviews of several order types, such as nonmarketable limit orders, stop orders, and orders received outside of regular trading hours. Hundreds of thousands of orders each month fell outside the firm’s “regular and rigorous” review process. In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Jessica Hopper, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, said: “Best execution of customer orders is a key investor protection requirement. FINRA member firms must exercise reasonable diligence in performing regular and rigorous reviews to achieve best execution for their customers.”

Earlier in 2019, Robinhood was granted the famous BitLicense from the New York State, which allows them to offer cryptocurrency trading services with the approval from the NY government.

Robinhood’s crypto app offers its trading services without any added transaction fees since early 2018. Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).