They were fined by FINRA last year for best-execution slipups as well:
https://www.finra.org/sites/default/files/2019-12/robinhood-...
SEC charges Robinhood $65M for misleading customers about revenue sources
201–210 of 318 posts
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#202Earlier quoted context omitted.
Robinhood probably has a binding arbitration clause in their contract that prohibits users from joining a class action lawsuit, no?
Yes, and the extent that matters depends how much people care. Uber was nickel and dimed by a billion dollars in arbitration fees (significantly more than an expected class action valuation) -- the binding arbitration clause cuts both ways.
It’s about more than just the cash cost though. In many jurisdictions court cases decisions can create legally binding precedent. Arbitration typically does not, a critical advantage when Uber was very busy trying to make sure courts the world over never decided drivers are employees etc. Arbitration could never really make that distinction binding, risk a court might.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#203To add a bit of context: brokerages like Robinhood send buy/sell orders to national exchanges and to private trading firms e.g. high-frequency traders. Private firms provide price improvement: orders that execute at prices better than the national exchange. All brokerages have a duty of best execution, including a duty of price improvement. Brokerages can also receive payment for order flow from private firms, as lon…
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO.
But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating the trading.
Everybody knows that retail traders are cheaper to trade with, and everybody knows where the retail trades come from: the retail broker-dealers. So market makers cut deals with retail broker-dealers: they chop up the cost savings between themselves and their customers, who get prices below the NBBO. That's called "price improvement".
What happened here is that Robinhood claimed in its marketing to be obtaining the best available prices for its customers. But it wasn't living up to that claim. Its upstream market makers made it clear to them that they could get more price improvement for their customers, if they took less in PFOF rebates.
The SEC filing suggests that Robinhood was offered 80/20 price-improvement/rebate, and instead took 20/80. The two big problems here: first, 20/80 is worse than other retail brokerages (virtually all of which do PFOF, because none of them are especially competent at actually executing trades) --- even if you factor in the lack of trading fees, and second, Robinhood had claimed in its own marketing that they did the opposite.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#204Earlier quoted context omitted.
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
More like you want to buy something that would cost 100, and RH got paid 5 to send your order to a trading company, and that trading company executed at 101.
No. If you had a limit buy, Robinhood would never exceed your limit. Period. That would be highly illegal.
This is more like you want to buy something at 100. Robinhood then goes to the market and looks at all the vendors. The vendors are selling at various prices. Robinhood has a relationship with one of the vendors so they went there and that vendor was willing to sell at 98. However, a vendor down the street (that Robinhood doesn't like) would have been willing to sell at 97.
None of that is illegal. What the SEC is arguing here is that Robinhood didn't tell the customers this when they advertised "commision-free" trades. In Robinhood's eyes, they didn't charge a commission, so this was accurate. But in the SEC eyes, the customer was paying a "hidden" commission because they would get a slightly worse price than if they went with a different broker.
Imagine you are Fidelity... All of a sudden, you have Robinhood advertising "commission-free" and you just lost a good chunk of business from retail traders. You then complain to the SEC because the advertising here is not entirely accurate - the customers might have even gotten a better price with Fidelity - even if you add in the commission.
FTA: > The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#205Earlier quoted context omitted.
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
More like you want to buy something that would cost 100, and RH got paid 5 to send your order to a trading company, and that trading company executed at 101.
No, that's not how it works
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#206If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?
SEC doesn't work on behalf of consumers, it works on behalf of the federal government. Robinhood customers are still free to bring lawsuits against the company and those would be heard in courts.
That ... seems like a pointlessly inefficient way to do things.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#207Earlier quoted context omitted.
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO. But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating…
I work at a market maker, and what you say is mostly correct. However, I would like to add that retail customers get better prices not primarily because they move less volume (though this is certainly a factor), but because their order flow is significantly less toxic. Retail traders don't really know anything and their order flow contains less alpha, so market makers can quote better prices to them without getting run over.
It's very important for market makers to separate out order flows and assign a toxicity to each flow. This way, they can provide tighter spreads and better execution on less toxic flows while being a little looser for highly toxic institutional flows.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#208If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?
SEC doesn't work on behalf of consumers, it works on behalf of the federal government. Robinhood customers are still free to bring lawsuits against the company and those would be heard in courts.
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Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#209I always wondered about the name 'Robinhood' since it applies taking from the rich and giving to the poor. Maybe it could be renamed to Sheriff of Nottingham.
Well, to be fair, before Robinhood came along it was still pretty standard to pay huge fees AND have your order flow sold. I wish they had been straightforward about what they're doing instead of explicitly lying on their website about where their money comes from, though.
Re: SEC charges Robinhood $65M for misleading customers about revenue sources
#210ELI5: why exactly did the clients get bad execution? Does sending order flow to trading firms in itself cause unfavorable execution? Or did the trading firms treat order flow from RH differently than from other sources? Or is it something else? And does the fact that RH was receiving large payments for order flow impact the quality of execution?
Basically, if you want to buy AAPL at $100 and as your broker, I take that info and share it with someone else, such as an HFT, they will quickly (milliseconds/nanoseconds) buy AAPL and sell you at a higher price. So, while you expected to pay $100, you ended up paying $100.10. Now that doesn't seem a lot to you but times the difference (10 cents) by volume and number of Robinhood customers placing orders and it can…
No that's not how it works at all.
Source: work at a hft market making firm