FINRA slaps $1.25m fine on Robinhood Financial over best execution violations
The violations relate to Robinhood customers’ equity orders and supervisory failures that spanned from October 2016 to November 2017.
The United States Financial Industry Regulatory Authority (FINRA) has just announced the imposition of a $1.25 million fine on Robinhood Financial, LLC 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.
FINRA Rule 5310 – Best Execution – requires firms 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 member firms that route customer orders away for execution can satisfy their best execution obligations by conducting either an order-by-order review of execution quality or a “regular and rigorous review.” FINRA Rule 5310 enumerates a number of criteria for firms to evaluate in these reviews.
During its reviews, Robinhood did not reasonably consider the Rule 5310 execution quality factors (such as price improvement) that the firm could obtain from alternative markets. Instead, Robinhood’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.
Further, 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. As a result, hundreds of thousands of orders each month fell outside the firm’s “regular and rigorous” review process.
In addition, Robinhood’s supervisory system was not reasonably designed to achieve compliance with its best execution obligations. The firm’s supervisory system disregarded several order types and factors to be considered in conducting its best execution reviews. Also, the firm’s written supervisory procedures concerning best execution and its “regular and rigorous” reviews merely recited the regulatory requirements. They provided no description of the firm’s supervisory system or guidance as to how it should supervise to achieve compliance with those requirements.
In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. On top of the fine, Robinhood also agreed to retain an independent consultant to conduct a comprehensive review of the firm’s systems and procedures related to best execution.