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FINRA Finds That "Free" Has a Price at Robinhood

Last week, the Financial Industry Regulatory Authority ("FINRA") announced that it had fined Robinhood Financial, LLC for "best execution violations." As many of you know, Robinhood is an online trading platform particularly popular with millennials that advertises commission free trades, "now and forever." What they didn't tell their customers, according to FINRA, is that some of those free trades came at a price - Robinhood directed certain trades to four broker-dealers who paid for that order flow. By doing that, FINRA states that Robinhood "did not reasonably consider the Rule 5310 execution quality factors (such as price improvement) that the firm could obtain from alternate markets."

In other words, unless one of those four broker-dealers were offering the best execution (i.e. lowest price on a purchase, highest price on a sale) those "free" trades cost the customer at the time of sale. As always, if something sounds too good to be true, it probably is.   

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.

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