The US Securities and Exchange Commission (SEC) has announced an enforcement action against popular US equities broker Robinhood Financial, LLC relating to the execution of traders’ orders, which stipulates a fine of $65 million to be paid to the regulators to settle the matter. The enforcement action stems from “Robinhood’s failure to satisfy its duty of best execution” among other irregularities.
Among the notable issues, the SEC stated that “Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors. For larger value orders, this price difference at Robinhood exceeded the commission its competitors would have charged. These inferior prices were caused in large part by the unusually high amountsRobinhood charged the principal trading firms for the opportunity to obtainRobinhood’scustomerorderflow. These payments are generally referred to as “payment for order flow.”
As such, it looks like the “zero commission” trading craze that took over retail US equities markets in the past year and a half has caught up with the industry – as brokers had to find new ways to generate revenue absent any traditional commissions for trading. Further in the SEC notice, the regulator noted that Robinhood knowingly misled the public “after media outlets raised questions about whether Robinhood’s payment for order flow rates negatively affected the execution prices that Robinhood customers received on their orders.” Robinhood responded by claiming as part of an FAQ page on its website that its order execution quality matched or beat that of its competitors. However, at that time, Robinhood had begun comparing Robinhood’s execution quality to competitors’ and was aware it was worse in many respects.
It remains to be seen how the execution of trades was handled by competitors during this time when many market participants were fighting over lucrative US retail equities traders during the stock market rallies of late 2019 and post-Covid 19 shocks in spring 2020.