Robinhood Responds To Allegations Of Shortchanging Customers

Robinhood is pushing back following allegations by a Seeking Alpha contributor that the company sells its order flow to exchanges at a higher rate than other discount brokerages, suggesting that Robinhood customers potentially receive lower execution quality and worse execution prices.

Robinhood responded to the claims in a statement to Benzinga and said its exchange rebates do not trump its obligation to provide the best possible trade executions.

The Accusation

The issue at hand is Robinhood's participation in what's known as payment for order flow. Payment for order is the practice where brokers are paid to route their customers' orders to specific third parties, usually high-frequency traders, who then place the customers' trade for a fractionally better price before returning the proceeds back to the exchange. 

The original Seeking Alpha post questioned Robinhood’s transparency because the rebate payments Robinhood reports it receives from these third parties seem to indicate the company is paid much more for order flow to the same exchanges as companies such as TD Ameritrade Holding Corp. AMTD and E*TRADE Financial Corp ETFC.

While other companies report rebate payments on a per-share basis, Robinhood reports them on the basis of “per dollar of executed trade value.” The poster used a hypothetical example of $1 million in identical trade volume for a $50 stock generating $22 for E*TRADE and $260 in rebates for Robinhood based on the two companies’ reported rebate rates.

The Response

Robinhood said there’s a simple explanation for why the company reports rebates on a per-dollar basis rather than a per-share basis.

“Robinhood’s zero-commission model has unlocked the ability for every American, not just large institutions, to participate in a variety of investing strategies that were previously economically unfeasable. One example is being able to invest in securities that cost less than $20 per share, such as Chesapeake Energy Corporation CHK, Sprint Corp S and Ford Motor Company F," the company said. "Traditional per-share rebates do not make sense for Robinhood’s executing venues since the number of shares Robinhood’s customers transact per dollar is higher than on other platforms." 

If Robinhood were to switch to a per-share model, the company said it would generate even more revenue from rebates. 

The brokerage said it takes seriously its legal obligation to provide its customers the best possible order prices. 

“Any rebates Robinhood receives do not adversely impact this best execution obligation,” the company said.

Instead, Robinhood said it relies on an algorithmic approach to automatically route orders to execution venues that are most likely to provide the highest execution quality.

Avoid The Confusion

For any traders concerned more about execution price than execution speed, the best way to avoid any drama related to rebates is to simply place a limit price on all orders. As another Seeking Alpha contributor recently wrote, the only way to guarantee the price on any trade is to name it using a limit order.

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