A broker-dealer settled FINRA charges for failing to supervise the executing broker-dealers to which it sent orders to determine that they provided best execution, as required FINRA Rule 5310 ("Best Execution and Interpositioning") for the broker-dealer's customers.
According to the Letter of Acceptance, Robinhood Financial, LLC ("Robinhood") promised its customers commission-free trade execution. Robinhood received payment for order flow from the various firms to which it sent trades for execution. FINRA alleged that Robinhood failed to supervise adequately those firms to ensure they were actually providing quality executions for Robinhood's customers.
To settle the charges, Robinhood agreed to (i) a censure, (ii) a $1,250,000 fine and (iii) hire an independent consultant to conduct a review of the firm's supervisory systems.
Commentary
While receipt of payment for order flow is not a violation of the duty of best execution, FINRA and the SEC have emphasized that firms receiving such payments should carefully evaluate the potential impact on execution quality. This enforcement action is a reminder for firms that, especially under heightened scrutiny when receiving payment for order flow, execution quality should be regularly and substantively analyzed, including assessing the execution quality of potential alternative routing arrangements.
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