WASHINGTON—FINRA announced today that it has fined Robinhood Financial, LLC $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. 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 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.
In addition, 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. Accordingly, 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. Further, 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.
“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.”
FINRA included best execution as a topic in its 2019 Annual Risk Monitoring and Examination Priorities Letter.
In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.