Robinhood Financial hit with class action lawsuit for selling stock orders, Garage

[SAN FRANCISCO] Robinhood Financial was sued in a proposed class action lawsuit for allegedly failing to inform clients that it was selling its stock orders to trading firms and effectively collecting back door commissions.

The lawsuit filed Wednesday in federal court in San Francisco follows the company’s $ 65 million settlement last week with the U.S. Securities and Exchange Commission (SEC) over similar allegations.

While Robinhood promoted “commission-free” trading on its platform, it did not disclose that it relied heavily on “pay per order flow,” collecting payment from market makers in exchange for executing trades, according to the lawsuit.

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

As part of the settlement with the SEC, Robinhood agreed to have an outside consultant monitor its compliance by making sure it follows the rules that require companies to provide best execution for trades.

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Robinhood, which did not admit or deny the regulator’s claims, said at the time that it is now completely transparent in its communications with clients about how it makes money.

Nora Chan, a spokeswoman for Robinhood, declined to comment.

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