A proposed class action alleges Robinhood has capitalized on the naïveté of its “unsuspecting and largely unsophisticated” users by negotiating “payments for order flow,” the primary source of most of the stock trading platform’s revenue, at rates four times the industry standard.
The 24-page securities lawsuit alleges Robinhood has misled users and breached its duty of best execution by accepting less price improvement for customers’ trades than what principal trading firms were offering in exchange for a higher rate of payments for order flow, the compensation a brokerage firm receives for directing orders to different parties for trade execution, for itself.
Further, defendants Robinhood Financial, Robinhood Securities and Robinhood Markets have misrepresented their receipt of order flow payments and the execution quality of trades made on the platform, omitted “material revenue information” from their website and communications with customers and concealed the order flow payments and poor execution quality, the complaint claims.
“Robinhood did not disclose that it generates most of its revenue from [payments for order flow], the terms of those arrangements, or the pass-through of those [payments for order flow] to customers in the form of less favorable trade execution prices,” the lawsuit alleges. “Robinhood enjoyed huge profits from ‘dark-pool’ [payments for order flow] arrangements. Robinhood’s customers were harmed in that Robinhood’s [payments for order flow] caused them to receive inferior execution prices than [sic], and not the best execution prices that they were entitled to by law.”
According to the suit, Robinhood not only failed to disclose its payments for order flow until late in the class period but withheld details on their negative impact on the execution quality of customers’ trades and “took affirmative steps” to cover up the high payments for order flow and resulting poor execution quality. The case alleges Robinhood did so by misrepresenting that its payments for order flow revenue was “indirect” and “negligible,” among other alleged falsehoods.
The plaintiff, a 32-year-old Santa Barbara, California resident, is described in the lawsuit as within Robinhood’s “target market.” According to the case, the plaintiff began using Robinhood’s services around December 2017 because he believed, among other things, that the company achieved best execution on client trade orders.
The plaintiff, like members of the proposed class, did not know of Robinhood’s payments for order flow arrangements and their adverse effect on trade execution prices, the lawsuit says, asserting he “could not have learned from any publicly available source how much price improvement he lost on his orders” as a result of the defendants’ actions.
The lawsuit looks to represent a class comprised of all California residents who used Robinhood’s brokerage services between September 1, 2016 and June 16, 2020 to place investment orders in connection with which Robinhood received payment for order flow.
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