US Regulator FINRA fines commission-free investing app Robinhood $ 1.25 million in a civil action for failing to provide the best execution price of customer equity orders. And it also fails to supervise the process properly.
20 December, 2019 | AtoZ Markets – Robinhood Financial agreed to pay a $ 1.25 million fine to US Regulator. Because it failed to ensure its customers of getting the best price for securities orders.
What Caused the $1.25 Million Fine of Robinhood?
Robinhood allows its clients to trade stocks for free. It has routed all transactions to four brokerages that have paid for the order flow. The Financial Sector Regulatory Authority (FINRA) said it in a statement Thursday. In doing so, Robinhood did not consider factors such as “price improvement.” It could have obtained the price improvement for clients by sending trades elsewhere, said the regulator. Retail brokers like Robinhood often make money by selling their clients’ orders to high-frequency trading companies, or market makers.
Robinhood also did not conduct a systematic review of several types of orders, such as stop orders and limit orders, Finra said. Robinhood did not admit or deny the allegations, which took place from October 2016 to November 2017. According to the settlement, Robinhood agreed to hire an independent consultant to conduct a comprehensive review of its compliance practices. It said:
“The facts on which the settlement is based, do not reflect our current practices or procedures. We have significantly developed our execution monitoring tools and processes for best execution in the past two years. And we have established relationships with other market makers.”
Robinhood’s Customers Took Advantage of a Leverage Flaw
Robinhood, which has become a Silicon Valley darling for its popularity among millennials, has experienced recent setbacks. In November, some customers took advantage of a loophole. That allowed them to make highly leveraged trades without putting enough cash to support the transactions. Last December, the company falsely said, Securities Investor Protection Corp would guarantee client deposits. For that, it botched the rollout of a new checking account.
According to its recent measurements, Robinhood welcomed ten million users. That was the double number of last years. And it gained an evaluation of 7.6 billion dollars during its six years of existence. Also, it increased 2 billion dollars compared to its 2018 Series D valuation. Its free commission model for stock trading has managed to attract millennial. And it put pressure on big brokerages that have had to catch up with a wave of fee-eliminating announcements in the last two months.
For the time being, Robinhood can keep its free platform afloat by compromising on business aspects. They are such as not having many physical locations, small staff for customer service, and not spending on massive promotional campaigns.
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