Robinhood Faces Class Action Suit for Backdoor Commission Fees

Robinhood is being sued in a class action for allegedly failing to tell clients it was selling their stock orders to trading firms and charging back-door fees.
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Online trading platform Robinhood Financial is being sued in a proposed class action for allegedly failing to inform clients it was selling their stock orders to trading firms and effectively charging backdoor commission fees.

The complaint, filed Wednesday in San Francisco federal court, follows the trading platform company’s $65 million settlement last week with the U.S. Securities and Exchange Commission over similar allegations, Bloomberg reported.

While Robinhood touted “commission free” trading on its platform, it didn’t disclose that it relied extensively on “payment for order flow,” collecting payment from market makers in exchange for executing trades, according to the suit.

“The principal trading firms/electronic market makers in turn passed these costs along to Robinhood’s clients on each trade through inferior execution quality - the price at which the requested market orders were executed,” according to the complaint.

Robinhood last week agreed to pay $65 million to settle SEC charges that it “failed to disclose" payments it received from trading firms for routing customer orders to them.

As part of the SEC settlement, Robinhood agreed to have an outside consultant monitor its trades to ensure it is following the rules requiring firms to provide best execution for trades.

The SEC also charged Robinhood with “failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.”

Massachusetts securities regulators also have filed a complaint against Robinhood, claiming the company markets its services to novice investors and has neglected to protect them from unsafe investment strategies like shorting and using leverage.