Robinhood Financial Securities Enforcement Case: Negotiating Away the Customer’s Better Price

In the Robinhood Financial securities enforcement case, the company agreed to pay a $65 million civil penalty to settle SEC charges over payment-for-order-flow disclosures and inferior trade prices. The Securities and Exchange Commission alleged that Robinhood negotiated higher payments for itself by accepting less price improvement for customers, then promoted execution quality that its own analysis contradicted. For someone who negotiated the rates, built the comparison or approved the customer message, those are decisions made inside the business.

The SEC announced the settlement against Robinhood Financial LLC, the broker offering self-directed securities trading through its website and smartphone applications. This page follows that company’s routing negotiations, customer communications and internal reviews. Our broader page on best execution and order-routing disclosures explains the market mechanics across brokerages.

The Routing Deal Paid Robinhood More and Customers Less

Payment for order flow meant that trading firms paid Robinhood for sending them customers’ securities orders. As the SEC’s order explains, those firms could take the other side of a customer’s trade or send the order to another market center. A firm taking the other side sought to exit its position at a profit.

The Securities and Exchange Commission alleged that Robinhood initially used another broker for clearing and order routing, receiving a share of the routing payments. In 2016, Robinhood decided to route directly to trading firms to earn additional revenue. During negotiations, trading firms told Robinhood that higher payments to the broker would leave less money available for customers’ price improvement.

The order describes the bargain in unusually concrete terms. At least one trading firm told Robinhood that large retail brokers typically obtained an 80/20 split of the value between customer price improvement and payments to the broker. The agency alleged that Robinhood negotiated approximately the reverse, a 20/80 split, explicitly accepting less improvement for customers in exchange for a higher payment rate for itself. We call that an expensive free trade.

The Customer Cost Survived the Commission Savings

The Securities and Exchange Commission alleged that certain Robinhood orders lost approximately $34.1 million in price improvement, even after allowing for the commissions competing brokers would have charged. That comparison covered October 2016 through June 2019. In the agency’s account, the customer cost survived the saving Robinhood used to sell the service.

Price improvement means buying below the lowest prevailing public offer or selling above the highest prevailing public bid. The order alleged that Robinhood failed to compare its execution quality adequately with competing brokers’ results. A trade at the public quote could still leave a customer worse off than a trade through another broker.

According to the order, Robinhood’s own analysis concluded that customers placing most orders of more than 100 shares would have been better off elsewhere, even with the competing brokers’ commissions. Larger orders showed greater lost price improvement. For an employee responsible for execution reports, the size of the order belongs beside the headline claim about trading costs.

The Revenue Explanation Left Out the Largest Source

The Securities and Exchange Commission alleged that Robinhood omitted payment for order flow from its prominent explanation of how it made money, even though routing payments were its largest revenue source. In a separate early FAQ, Robinhood described that revenue as indirect and negligible and promised to update its main revenue explanation if the payments became direct or significant. The order says payment for order flow accounted for more than 80% of revenue during 2015 through mid-2016.

According to the order, Robinhood subsequently deleted the separate payment-for-order-flow FAQ without keeping records of when, why or who approved the removal. It updated the main revenue FAQ to add smaller revenue sources while continuing to omit routing payments. The problem reached the customer-service desk: the agency alleged that training told representatives to avoid the subject and treated identifying it as a revenue source as incorrect.

Robinhood did disclose some routing-payment information in required reports housed in its online disclosure library, according to the order. The Securities and Exchange Commission alleged that those reports received less prominence than the FAQ used in customer communications. An employee answering questions about the business could be directed toward a company-approved explanation that left out the company’s largest revenue source.

The Website Promise Contradicted the Internal Analysis

The Securities and Exchange Commission alleged that Robinhood claimed to match or beat competing brokerages’ execution quality while internal comparisons showed worse results. The order quotes the website language published in October 2018:

The order says employees comparing execution quality that same month found worse results on most measures. A more extensive analysis in March 2019 reached senior personnel and measured the shortfall per order, per share and per dollar traded. The company’s own conclusion, reproduced in the order, was blunt:

The Securities and Exchange Commission alleged that Robinhood’s best execution committee failed to take appropriate steps in response to the comparison. According to the order, Robinhood removed the website claim after examination staff raised concerns about the sentence. The analysis had the worse results. The website kept the better story.

The Smart Router Started With a Restricted Choice

Robinhood’s smart order router compared trading firms willing to pay its routing rates, according to the SEC’s allegations. It sent an order to the participating firm that had provided the most price improvement for that stock over the preceding 30 days. It did not address the prices available at venues unwilling to pay Robinhood’s rates.

The order supplies a concrete example of how a firm left that group. In mid-2017, a trading firm offered to continue paying for order flow at a lower rate, and Robinhood stopped sending it customer orders. For an employee who worked on the router or its reviews, the choice of participating firms can explain as much as the algorithm’s ranking of them.

The Securities and Exchange Commission also alleged that Robinhood’s best execution committee observed poor price improvement but did not assess whether the routing-payment rates caused worse customer prices. In the agency’s account, the committee kept meeting. The payment rates escaped review.

What Evidence Is Needed for Whistleblowing?

In an order-routing case, the useful securities fraud evidence connects the payment arrangement, the customer promise, the trading result and the decisions made after an internal review. Robinhood’s order shows why those records belong together: the rate negotiation explained the incentive, the analysis measured the result and the website continued to make the comparative claim.

A customer-service employee may know which answer management approved and which subject training excluded. A trading or engineering employee may know which firms the router could select and how the execution comparison was calculated. Someone involved in a committee review may know whether the analysis prompted a change in rates, routing or disclosures. We work with the person who understands those records to connect what the business knew with what customers were told.

The Settlement Required More Than a Penalty

The settlement required an independent consultant to review customer communications, routing payments and best execution. The order called for comparisons with other brokers’ payment arrangements and execution results. It also required an assessment of whether identified deficiencies called for renegotiating or changing routing arrangements.

The consultant’s assignment included checking whether Robinhood’s internal execution analysis agreed with its customer disclosures. Although Robinhood Financial was the respondent, the review also covered specified policies and procedures at Robinhood Securities, the affiliated firm receiving its customer orders for execution.

The Later SEC Action Covered Different Brokerage Failures

A separate Securities and Exchange Commission action announced on January 13, 2025 involved both Robinhood Securities and Robinhood Financial and concerned brokerage reporting, recordkeeping and customer safeguards. The order-flow case addressed the routing payments Robinhood negotiated, the prices customers received and the revenue disclosures and execution claims they saw.

What an Insider Can Add to the Public Story

An insider can explain how a comparison was built and who received it, or why a customer statement stayed in place after conflicting results reached management. The 2018 Journal of Forensic & Investigative Accounting paper The Significance of Whistleblowing as an Anti-Fraud Measure, studying occupational fraud, found that having more anti-fraud measures was associated with a greater likelihood of detection through whistleblowing.

Through the SEC whistleblower award program, eligible whistleblowers can receive a combined 10% to 30% of qualifying sanctions collected in an action imposing more than $1 million. Separately, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For information about brokerage disclosures and execution quality, we assess the SEC whistleblower route with you.

You Know What the Comparison Left Out

If you saw the routing bargain, the unfavorable comparison or the instructions given to customer-service staff, talk with our whistleblower experts about what happened inside the brokerage. We build the securities fraud whistleblower case with you and bring in securities fraud whistleblower lawyers who understand execution quality, trading records and customer disclosures. We stay beside you as your knowledge becomes a case the SEC can investigate.