Online Broker Robinhood Hit With $1.25 Million FINRA Fine

The Financial Industry Regulatory Authority (FINRA) has fined discount online broker Robinhood $1.25 million for best execution violations and supervisory failures that took place between Oct. 2016 to Nov. 2017. 

According to the press release, the zero-commission broker was routing customers' non-directed equity orders to four broker-dealers or market makers in exchange for rebates without ensuring they were the best markets for execution. The practice of receiving money for order flows is known as payment for order flow, and while it isn't illegal, FINRA requires firms to conduct order-by-order review of execution quality or a regular and rigorous review to guarantee that customers are getting the best prices possible. It says Robinhood was only ascertaining the execution quality of its pre-existing routing destinations and not considering alternative markets.

The regulator said Robinhood also failed to perform systematic best execution reviews of several order types, such as non-marketable limit orders, stop orders, and orders received outside of regular trading hours.

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

A key reason why FINRA requires brokers to report how they route their orders is that market makers who pay brokers for their order flow typically make those trades against their own inventory rather than executing the orders on the visible exchanges. The FINRA rules that ensure that these orders are executed at the national best bid or offer (NBBO) were enacted in 2005 under the title Regulation NMS.

FINRA also found the platform's supervisory system "was not reasonably designed to achieve compliance with its best execution obligations." The firm's written supervisory procedures only repeated the regulatory requirements and included no guidance on how to supervise to achieve compliance with those requirements. 

Robinhood, which has been a FINRA member since Oct. 2013 and serves around 10 million people, did not admit or deny any wrongdoing but agreed to pay the fine and hire an independent consultant to conduct a comprehensive review of its systems and procedures.

A company spokesperson told the press that the facts on which the settlement is based does not reflect current practices or procedures. “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,” they said.

The popular app was launched in 2014 and is geared toward young investors. The co-founders said they were looking to "democratize access to the markets" after observing the Occupy Wall Street movement. The company, which was valued at $7.6 billion during a July 2019 funding round, makes around half of its revenue from order flow rebates, according to Bloomberg. It recently said it has 10 million customers who use the app. The controversial Wall Street arrangement of third parties paying brokers to receive orders was pioneered by Bernie Madoff in the 90s.

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