Robinhood, Sued for Lackluster Execution
The largest independent regulator for all securities firms Financial Industry Regulatory Authority (FINRA) fined commission-free investment app Robinhood $1.25 million. The regulator sued the firm for sending customer trading orders, failing to guarantee the best trading execution.
Finra Rule 5310 requires firms to “use reasonable diligence” to ensure brokers offer the best possible price for executions. Robinhood’s supervisory system wasn’t designed to achieve compliance.
FINRA claimed these violations were held in October 2016 and November 2017 but didn’t provide any further detail. In response, Robinhood said they don’t reflect current operations.
A Robinhood spokesman claimed the facts in the settlement relates to historical issues of monitoring tools and processes.
As part of the settlement, the provider agreed to hire an independent consultant to review current execution systems and procedures. In exchange, the provider can keep its platform afloat with few physical locations with a small staff for client service.
The firm’s violation has a significant part in its primary income, clients’ payment for order flow. Catering mostly to Millennials, the service brought in $70 million in revenue for the broker last year.
Robinhood currently ushers ten million users and values almost $8 billion.
Past Robinhood Missteps
Despite the firm’s fame, Robinhood’s Millennial charisma seems like it’s slowly fading. Reports emerge of the company’s involvement in glitches and bugs.
Robinhood announced a savings product last month, which would supposedly pay 3% interest only to be warned against it. Regulators quickly cautioned against it, saying it would be illegal, so the company relaunched with a 2% rate instead.
Just last month, a bug infected the broker’s system that allowed traders to trade unlimited stocks amounting to free money.
Reports claim these issues point to governance issues similar to WeWork. However, some also say the potential reason for unease is their underlying business model.
A reliable source said the company has a vast majority of its revenues untouched. The actions raise questions of how the company makes a profit.