Last week the Securities and Exchange Commission (“SEC”) announced charges against Robinhood Financial LLC (“Robinhood”) with respect to the prices paid and received by its customers on trades made through its platform. Robinhood was charged with making repeated misstatements failing to disclose its receipt of payments from trading firms for routing customer orders to it as well as for its failure to comply with its mandated duty to seek the best execution for its customer’s orders. In connection with settling these charges, Robinhood agreed to pay $65 million dollars. This sanction was in addition to FINRA’s action regarding similar conduct. 

The SEC’s order states that Robinhood misleads customers by failing to reveal its largest revenue source when describing how it made money. This revenue stream, called “payments for order flow,” came from outside trading firms and was paid in exchange for Robinhood’s sending customer orders to them. Despite Robinhood’s representations to customers that trading was “commission-free,” this was not completely transparent. In fact, according to the SEC’s order,  because of its unusually high payment for order flow rates as compared to other firms, Robinhood’s customers’ orders were executed at inferior prices.  The SEC charged that these inferior trade prices collectively cost Robinhood customers $34.1 million even after taking into account customer savings from not paying commissions.  

Broker-Dealers are Required to Execute Customer Trades at the Best Price 

Brokerage firms are required to get the “best execution” of orders for their customers. Best Execution—requires firms to use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. 

The SEC found that in March 2019 Robinhood was aware that its execution prices were worse than its competitors. An internal analysis done by Robinhood concluded that “[n]o matter how we cut the data, our % orders receiving price improvement lags behind that of other retail brokerages by a wide margin.” Robinhood knew that the amount of price improvement obtained for Robinhood customers was far lower than at competing broker-dealers, measured on a per order, per share, and per dollar traded basis. 

That analysis revealed that for most orders of more than 100 shares, Robinhood customers would be better off trading at competitors because the additional price improvement that such orders would receive would likely exceed the approximately $5 per-order commission costs at those other firms. The internal analysis further found that the larger the order, the more significant the price improvement losses were for Robinhood customers. For example, in customer orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares. Senior management at Robinhood was aware of this, according to the SEC.

Accordingly, the Director of the SEC’s Enforcement Division stated  that “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm.” Noting that online trading platforms are creating alternative ways for customers to invest, the SEC stated that there “are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money,” but added, “innovation does not negate responsibility under the federal securities laws.”

The SEC Requires Robinhood to Hire an Independent Consultant to Ensure Best Execution of Customer Trades

In addition to sanctions mandated by FINRA, the SEC order requires the engagement of an Independent Consultant to  conduct:

1. A comprehensive review of Robinhood’s supervisory, compliance, and other policies and procedures designed to ensure that Robinhood’s retail communications, including all disclosures relating to Robinhood’s receipt of payment for order flow, comply with the content, books and records, and other requirements of the federal securities laws.

2. An updated review of Robinhood’s and Robinhood Securities’ policies and procedures, specifically including Robinhood Securities’ [written supervisory policies] and Execution Quality Procedures Manual, designed to ensure that Robinhood’s and Robinhood Securities’ payment for order flow arrangements and rates with principal trading firms are not interfering with their duty to seek to obtain the best execution for customers under the federal securities laws, including by ensuring that:

A) the policies and procedures require Robinhood Best Execution personnel to conduct a regular empirical analysis of the firms’ payment for order flow arrangements compared with those of other retail broker-dealers, based on publicly available payment for order flow data;

B) the policies and procedures require Robinhood Best Execution personnel to conduct a regular empirical analysis of the firms’ execution quality compared with that of other retail broker-dealers, based on the full set of data and analytical tools that trading venues (including principal trading firms and electronic market makers) make available to their broker-dealer clients to help them assess their execution quality compared to other firms, including the frequency and amount of price improvement, effective-over-quoted spread (E/Q), and payment for order flow rate, taking into account factors such as type of security, price of security, type of order, and size of the order; and

C) the policies and procedures require Robinhood Best Execution personnel regularly to assess whether any deficiencies revealed by the analyses described in subparts (a) and (b) above require renegotiation or other modifications of the firms’ order routing and/or payment for order flow arrangements.

3. An assessment of whether Robinhood has properly documented (1) that it is effectively following its policies and procedures in paragraph ii, and (2), to the extent warranted, that Robinhood has modified its order routing decisions and/or selection of trading center 13 counterparties based upon its empirical analysis of comparative execution quality. That assessment shall include a discussion of the execution quality that Robinhood achieved for its customers in comparison to the execution quality provided by other major brokerages; a discussion of the metrics Robinhood used to evaluate its order routing decisions and/or selection of trading center counterparties taking into account factors such as type of security, price of security, type of order, and size of the order; and a discussion of whether Robinhood’s internal execution quality analysis is consistent with its disclosures to customers.



Not everyone who loses money in online trading has a claim against their brokerage firm. However, under certain circumstances where misrepresentations or violations of securities laws and rules have occurred, investors may have the right to seek legal recourse. If you or a loved one have suffered investment losses as a result of an online investment or any other type of investment fraud or broker negligence, contact the offices of Investment Fraud lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney, Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 844-635-1609 or 305-349-2336.