The US Securities and Exchange Commission (SEC) has published its plan to distribute $65 million in civil penalty collected from the brokerage firm, Robinhood for non-disclosure of the practice of ‘payment for order flow’.
Per last week’s proposal, the financial market regulator has proposed a six-point evaluation process to distribute the collected penalties among Robinhood traders who were harmed.
The regulatory staff will evaluate the claims of each eligible investor based on the calculations of the harm on each customer order as the industry benchmark price improvement less Robinhood’s price improvement and less the industry benchmark commission on such an order. Additionally, they will calculate the interest on each customer order with non-zero harm using the short-term Applicable Federal Rate, compounded quarterly.
Eligible investors for receiving the compensation will be determined as traders who were directly affected due to the broker’s misconduct, impacting the execution prices.
Zero-Fee Services Comes at a Cost
As Finance Magnates reported earlier, Robinhood was fined $65 million at the end of last year by the market regulator as a disciplinary action. The broker was blamed for hiding the fact that its primary revenue driver was the controversial ‘payment for order flow’, under which it routed orders to principal trading firms in exchange for fees.
However, the routed orders received inferior execution prices, which violated the US securities market rules.
“Robinhood violated its duty of best execution by failing to conduct adequate, regular and rigorous reviews of the execution quality it provided on customer orders,” SEC’s order stated.
“Robinhood did not begin comparing its execution quality to that of its competitors until October 2018, and did not take appropriate steps during the entire period to assess whether its high payment for order flow rates adversely affected customer execution prices.”
The commission has already received the monies in a Fair Fund and is now seeking public consultation on its plan to distribute the proceeds among the affected parties.
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