The
Financial Industry Regulatory Authority Inc. fined mobile trading app
Robinhood Financial $1.25 million for failing to ensure investors receive the best prices on securities orders.
Robinhood, which settled the case by agreeing to the fine and to retain an independent consultant to review the firm's systems and procedures, does not charge commission on equity trades made using its app, instead it's paid by broker-dealers for routing orders to them.
The practice, known as payment for order flow, requires firms to review how orders are executed and to use "reasonable diligence" to ensure customers are getting the best price possible for buying or selling a security. But from October 2016 to November 2017, Robinhood routed equity orders to one of four broker-dealers, each of which paid Robinhood for the order flow, Finra said.
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Robinhood has a committee to ensure best execution, but Finra said the firm did not reasonably consider alternative markets that could have resulted in a better price.
"Best execution of customer orders is a key investor protection requirement," senior vice president and acting head of Finra's department of enforcement Jessica Hopper said in a statement. "FINRA member firms must exercise reasonable diligence in performing regular and rigorous reviews to achieve best execution for their customers."
Finra said the company's supervisory system was not reasonably designed to comply with best execution obligations. Its written procedures merely cited the regulatory requirements and provided no description of its supervisory system, Finra said.
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Additionally, Robinhood allegedly did not perform systematic review of order types, including limit orders, stop orders and orders received outside of regular trading hours. This resulted in hundreds of thousands of orders each much that fell outside Robinhood's review process.
Robinhood said in a statement that the facts the settlement is based on don't reflect its current practices.
Since 2017, "we have significantly improved our execution monitoring tools and processes relating to best execution, and we have established relationships with additional market makers," said the statement from Robinhood.
Attorneys who were not part of the case said firms' supervisory policies and processes are crucial.
"Supervisory procedures are a very important part of compliance," said Daniel Nathan, a partner at
Orrick Herrington & Sutcliffe.
Even if there was not problem with order executions, a firm can be exposed to regulatory actions if they don't have those procedures, he said.
Though legal, payment for order flow is a controversial practice in the industry.
An academic paper several years ago inspired regulators like Finra and the
Securities and Exchange Commission to conduct extensive review of brokerages' order-routing processes, Mr. Nathan said.
"The most important thing about a securities transaction is the price you're paying for it," he said. "You're depending on brokers to charge you the right price."
