Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 1 of 48
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`MIGLIACCIO & RATHOD LLP
`Selin Demir (SBN 331418)
`Nicholas Migliaccio, pro hac vice anticipated
`Jason Rathod, pro hac vice anticipated
`Bryan Faubus, pro hac vice anticipated
`388 Market Street, Suite 1300
`San Francisco, CA 94111
`Attorneys for Plaintiff and Proposed Class
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`Attorneys for Plaintiff and Proposed Class
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
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`
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`ISAAC LANDRETH and JAIME
`MARQUEZ, Individually and on
`Behalf of All Others Similarly
`Situated,
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` Plaintiff,
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` vs.
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`ROBINHOOD FINANCIAL, LLC,
`ROBINHOOD SECURITIES, LLC,
`AND ROBINHOOD MARKETS
`LLC,
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` Defendants.
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`CASE NO.:
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`CLASS ACTION COMPLAINT
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`(1) VIOLATIONS OF SECTION 10(B)
`OF THE SECURITIES EXCHANGE
`ACT OF 1934 AND RULE 10B-5;
`(2) VIOLATIONS OF THE
`CALIFORNIA UNFAIR
`COMPETITION LAW;
`(3) BREACH OF FIDUCIARY DUTY
`(4) BREACH OF IMPLIED COVENANT
`OF GOOD FAITH & FAIR DEALING;
`(5) NEGLIGENCE;
`(6) UNJUST ENRICHMENT; AND
`(7) VIOLATIONS OF THE MAINE
`UNFAIR TRADE PRACTICES ACT
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`DEMAND FOR JURY TRIAL
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`Plaintiffs Isaac Landreth and Jaime Marquez (“Plaintiffs”) allege the following based
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`upon the investigation of their counsel, which included a review of, among other things, United
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`States Securities and Exchange Commission (“SEC”) filings by Robinhood Financial, LLC
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`(“Robinhood” or the “Company”), as well as regulatory filings and reports, press releases and
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 2 of 48
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`other public statements issued by Robinhood, and various agreements between Robinhood and
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`its clients, except for allegations regarding his own acts, which are based on knowledge:
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` NATURE OF THE ACTION
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`1.
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`This is a class action on behalf of all clients of Robinhood who placed trade orders
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`with Robinhood between September 1, 2016, and June 30, 2019, (the “Class Period”) which were
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`not executed in accordance with Defendant’s duty to secure the best execution available. Plaintiffs
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`assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934 (the
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`“Exchange Act”) and SEC Rule 10b-5; violations of the California Unfair Competition Law;
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`breach of fiduciary duty; breach of the implied covenant of good faith and fair dealing;
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`negligence; unjust enrichment; and violations of the Maine Unfair Trade Practices Act, on behalf
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`of themselves and all similarly-situated customers of Robinhood, a wholly owned subsidiary of
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`co-defendant Robinhood Markets, Inc.
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`2.
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`Robinhood is a privately-owned financial services company that offers its
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`customers the ability to self-direct their investments in stocks, ETFs, options, and cryptocurrency
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`through its website and mobile application. Since its launch in 2015, Robinhood has grown into
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`a multi-billion-dollar enterprise. With the stated mission to “democratize finance for all,”1 the
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`Company has targeted young adults—the median age of a Robinhood user is thirty one2—and
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`1
`Our Mission, Robinhood.com, available at
`https://robinhood.com/us/en/support/articles/our-mission/ (last visited Feb.19, 2021).
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`2
`In re Robinhood Financial LLC, Administrative Complaint, Docket No. E-2020-0047
`(the “Massachusetts Complaint”), available at
`https://www.sec.state.ma.us/sct/current/sctrobinhood/MSD-Robinhood-Financial-LLC-
`Complaint-E-2020-0047.pdf.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 3 of 48
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`novice investors through youth-forward marketing and an interface that “gamifies” investing.3
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`Robinhood encourages its largely unsophisticated customer base to trade frequently, most notably
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`by promising “commission-free investing” and offering “unlimited commission-free trades in
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`stocks, funds, and options.”4
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`3.
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`Robinhood’s customers pay a hidden cost on each trade, however, one which often
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`exceeds the cost Robinhood’s competitors’ commissions. Robinhood accomplished this sleight
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`of hand through undisclosed arrangements that generate substantial profit for Robinhood in
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`exchanged for inferior execution quality for each and every one of its customers’ trades. In order
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`to conceal these arrangements, the sizable revenue resulting therefrom, and their impact on
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`customer trade execution prices, Robinhood omitted, misrepresented, and concealed material
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`facts from its customers and the public. The SEC found that this scheme cost Robinhood’s
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`customers approximately $34.1 million “even after netting the approximately $5 per-order
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`commission costs” charged by Robinhood’s competitors.5
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`4.
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`Robinhood, like all broker-dealers, owes its customers the duty of best execution.
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`Under Financial Industry Regulation Authority (“FINRA”) and SEC rules, this duty requires
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`Robinhood to conduct “reasonable diligence to ascertain the best market for the subject security
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`See, id. at 12-14 (discussing Robinhood’s strategies to encourage investor engagement
`with its application).
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`https://robinhood.com/; https://robinhood.com/signup.
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`5
`In re Robinhood Financial, LLC, SEC Admin. Proceeding, File No. 3-20171 (Dec. 17,
`2020) (order instituting administrative cease and desist proceedings) (hereinafter “Cease and
`Desist Order”) at 10.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 4 of 48
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`and buy or sell in such market so that the resultant price to the customer is as favorable as possible
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`under prevailing market conditions.”6
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`5.
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`Throughout the Class Period, Robinhood sought to conceal its practice of routing
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`customer orders to a group of outside trading firms (the “Trading Partners”) in exchange for
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`compensation. This compensation is remitted to Robinhood either as “liquidity rebates” or
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`“payment for order flow” (together, “PFOF”) (i.e., revenue to the Company) or “price
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`improvement” (i.e., improved prices for customer trade executions). Robinhood negotiated a
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`compensation split that reduced price-improvement for its customers in order to boost its own
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`revenues—approximately 20 per cent of the order flow compensation went to price improvement,
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`while 80 per cent went to Robinhood. This inverted the industry standard, generating 400 per cent
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`more revenue than the typical PFOF split, and reducing price improvement by 75 per cent. It was
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`a lucrative arrangement: Robinhood’s PFOF payments constituted the majority of its revenue
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`during the Class Period.
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`6.
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`Until late 2018, Robinhood wholly concealed the fact that it generated revenue
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`from PFOF, let alone that most of its revenue came from PFOF or that its arrangements deviated
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`from industry standards. Throughout the Class Period Robinhood continually acknowledged that
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`it owes its clients a duty of best execution and claimed to consider factors relevant to fulfilling
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`such duty when routing clients’ orders. It also expressly stated that its execution quality matched
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`or surpassed competing retail brokers. After the media raised concerns about its PFOF
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`arrangements in late 2018, Robinhood acknowledged that it relied on PFOF revenue while
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`maintaining that its order execution quality was equal to or better than its competitors. This claim
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`FINRA Rule 5310.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 5 of 48
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`was false, and senior personnel at Robinhood knew that it was false at the time, but the misleading
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`statements remained on Robinhood’s website until the end of June 2019.
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`7.
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`Robinhood’s reliance on PFOF revenue and its poor execution quality are material
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`facts. The Company omitted, concealed, and misrepresented its order flow practices and its
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`execution quality to continue growing its customer base and encourage its customers to continue
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`trading. Plaintiffs and other members of the Class relied on Defendant’s misrepresentations
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`regarding PFOF and execution quality, as well as Defendant’s omissions regarding its reliance on
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`PFOF, in continuing to use Robinhood’s trading platform.
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`8.
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`Robinhood’s failure to disclose these material facts regarding its actual order
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`routing practices and execution quality caused Plaintiffs and the Class substantial harm in the
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`form of, inter alia, higher prices for purchase orders, lower prices for sale orders, slower
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`executions, lesser fill rates, and exposure to a greater risk of adverse selection, than they could
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`have obtained by using a broker than fulfilled its legal and regulatory duties to provide best
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`execution.
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`9.
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`Robinhood’s material omissions and misrepresentations regarding its PFOF
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`arrangements and execution quality were a breach of Robinhood’s fiduciary duty to Plaintiffs and
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`the Class and violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5,
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`among other laws.
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`10.
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`Plaintiffs hereby seek, on behalf of themselves and all similarly-situated clients of
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`Robinhood, damages as well as restitution of benefits unjustly received by Robinhood at their
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`expense.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 6 of 48
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` JURISDICTION AND VENUE
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`11.
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`Plaintiffs assert claims for violations of Section 10(b) of the Securities Exchange
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`Act of 1934 (the “Exchange Act”) and SEC Rule 10b-5; violations of the California Unfair
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`Competition Law; breach of fiduciary duty; breach of the implied covenant of good faith and fair
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`dealing; negligence; unjust enrichment; and violations of the Maine Unfair Trade Practices Act.
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`12.
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`The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15
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`U.S.C. § 78aa and 28 U.S.C. §§ 1331 and 1332(d)(2)(a). This Court also has subject matter
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`jurisdiction over the claims asserted herein pursuant to the Class Action Fairness Act, 28 U.S.C.
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`§ 1332 (d)(2), since some of the members of the putative class (defined below) are citizens of a
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`State different from that of the Defendant and, upon the original filing of this Complaint, members
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`of the putative class resided in states around the country; there are more than 100 putative class
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`members; and the amount in controversy exceeds $5 million, exclusive of interest and costs.
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`13.
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`The Court has personal jurisdiction over the parties because Robinhood conducts
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`a major part of its national operations, advertising, and sales through continuous business activity
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`in this District.
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`14.
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`Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
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`U.S.C. § 1391(b) because Defendants transact business in this District and a substantial part of
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`the events or omissions giving rise to the claim occurred in this District. In addition, Robinhood
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`and Robinhood Markets both reside in this District. The principal executive office of both
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`companies is located at 85 Willow Road, Menlo Park, CA 94025.
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`15.
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`In connection with the acts, transactions, and conduct alleged herein, Defendants
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`used the means and instrumentalities of interstate commerce, including the United States mails,
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 7 of 48
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`interstate telephone communications, and the facilities of national securities exchanges
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`and markets.
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` PARTIES
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`16.
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`Plaintiff Isaac Landreth is a client of Robinhood and was continuously during the
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`Class Period. Plaintiff is a resident of the State of Maine. As detailed in his certification (attached
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`hereto as Exhibit A), Mr. Landreth purchased shares of U.S. based exchange-listed stocks in
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`trades executed during the Class Period and, as a result thereof, suffered damages from
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`Defendants’ unlawful conduct.
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`17. Mr. Landreth resides in and is a citizen of Auburn, Maine. Mr. Landreth is 37 years
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`old, falling within Robinhood’s target market. On or around May 2017, Mr. Landreth began using
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`Robinhood for brokerage services. Mr. Landreth chose to use Robinhood because, among other
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`things, he read that Robinhood achieved best execution on client trade orders. Mr. Landreth relied
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`on Robinhood’s represented compliance with its duties of best execution and that all investment
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`transactions would be made in compliance with state and federal law as stated in Robinhood’s
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`Customer Agreements, and Mr. Landreth reasonably expected Robinhood would comply with its
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`duty of best execution, duty of undivided loyalty to him, duty to fully disclose to him all material
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`facts, duty to refrain from acting adverse to his best interests, and duty to act in good faith.
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`18. Mr. Landreth did not know about Robinhood’s PFOF arrangements and their
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`adverse effect on his trade execution prices. Mr. Landreth could not have learned from any
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`publicly available source how much price improvement he lost on his orders as a result of
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`Robinhood’s actions. Had Mr. Landreth known that Robinhood had negotiated substantial PFOF
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`for itself which diminished the execution quality of his trades, Mr. Landreth would not have
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`utilized Robinhood’s brokerage services. As a result of Robinhood’s PFOF arrangements and
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 8 of 48
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`breach of its duty of best execution, Mr. Landreth incurred losses on many or all trades he
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`executed during the Class Period, which amount to at least7 one hundred and fifty trades by which
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`Mr. Landreth bought and sold at least 10,000 shares of various equities. In all, Mr. Landreth
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`invested at least $15,879.66 in equities through Robinhood’s trading platform during the Class
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`Period.
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`19. Mr. Landreth was also injured because Robinhood’s public misrepresentations and
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`poor execution quality impugned the integrity of the trade executions by, among other things,
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`adversely affecting the prices he and the Class members received on their investments. Mr.
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`improvements realized on his trade orders, and that Robinhood was not fulfilling its best
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`execution duties on his behalf, until such facts became publicly available. The amount of Mr.
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`Landreth’s losses can be determined through documents in Robinhood’s possession and expert
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`analyses of same.
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`20.
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`Plaintiff Jaime Marquez is a client of Robinhood and was continuously during the
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`Class Period. Mr. Marquez is a resident of the State of California. As detailed in his certification
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`(attached hereto as Exhibit B), Mr. Marquez purchased shares of U.S. based exchange-listed
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`stocks in trades executed during the Class Period and, as a result thereof, suffered damages from
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`Defendants’ unlawful conduct.
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`Mr. Landreth was unable to retrieve monthly statements and other trading activity
`information for the period beginning May 1, 2018, and ending October 31, 2018, from
`Robinhood. Consequently, the trading figures noted above reflect substantially less trading
`activity than Mr. Landreth’s actual trading activity. Mr. Landreth intends to obtain complete data
`sets through the discovery process.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`21. Mr. Marquez resides in and is a citizen of Hawthorne, California. Mr. Marquez is
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`28 years old and therefore is within Robinhood’s target market. Mr. Marquez first opened a
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`brokerage account with Robinhood on November 17, 2016, and began using Robinhood’s trading
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`platform the following February. Mr. Marquez chose to use Robinhood because, among other
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`things, he read that Robinhood achieved best execution on client trade orders. Mr. Marquez relied
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`on Robinhood’s represented compliance with its duties of best execution and that all investment
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`transactions would be made in compliance with state and federal law as stated in Robinhood’s
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`Customer Agreements, and Mr. Marquez reasonably expected Robinhood would comply with its
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`duty of best execution, duty of undivided loyalty to him, duty to fully disclose to him all material
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`facts, duty to refrain from acting adverse to his best interests, and duty to act in good faith.
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`22. Mr. Marquez did not know about Robinhood’s PFOF arrangements and their
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`adverse effect on his trade execution prices. Mr. Marquez could not have learned from any
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`publicly available source how much price improvement he lost on his orders as a result of
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`Robinhood’s actions. Had Mr. Marquez known that Robinhood had negotiated substantial PFOF
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`for itself which diminished the execution quality of his trades, Mr. Marquez would not have
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`utilized Robinhood’s brokerage services. As a result of Robinhood’s PFOF arrangements and
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`breach of its duty of best execution, Mr. Marquez incurred losses on all trades he executed during
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`the Class Period, which amount to nearly 900 trades—including, for example, 92 trades in
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`September 2017 alone— by which Mr. Marquez bought and sold approximately 41,000 shares of
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`various equities. In all, Mr. Marquez invested approximately $40,030 in equities through
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`Robinhood’s trading platform during the Class Period.
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`23. Mr. Marquez was also injured because Robinhood’s public misrepresentations and
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`poor execution quality impugned the integrity of the trade executions by, among other things,
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 10 of 48
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`adversely affecting the prices he and the Class members received on their investments. Mr.
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`Marquez did not know of Robinhood’s PFOF arrangements, their adverse effect on the price
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`improvements realized on his trade orders, and that Robinhood was not fulfilling its best
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`execution duties on his behalf, until such facts became publicly available. The amount of Mr.
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`Marquez’s losses can be determined through documents in Robinhood’s possession and expert
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`analyses of same.
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`24.
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`Defendant Robinhood Markets, Inc. is a financial service holding company
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`incorporated in Delaware with its principal place of business located at 85 Willow Road, Menlo
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`Park, CA 94025. It is the holding company for Defendants Robinhood Financial LLC and
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`Robinhood Securities, LLC. Defendant Robinhood Markets, Inc. is a named party to the
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`Robinhood Terms & Conditions Agreement8 governing Robinhood’s website and mobile
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`applications.9 Defendant Robinhood Markets, Inc., facilitated, participated in, and communicated
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`the PFOF misrepresentations and omissions to Plaintiffs and Class members and concealed their
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`detrimental effect on the execution prices Plaintiffs and Class members realized on their trade
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`orders.
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`25.
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`Defendant Robinhood Financial LLC is a full-service securities firm incorporated
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`in Delaware with its principal place of business located at 85 Willow Road, Menlo Park, CA
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`94025. Defendant Robinhood Financial LLC is a wholly owned subsidiary of Defendant
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`Current version available at:
`https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%20Terms%20and%20Conditions.
`pdf.
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`Per the Robinhood home page: “Robinhood means Robinhood Markets and its in-
`application and web experiences with its family of wholly owned subsidiaries which includes
`Robinhood Financial, Robinhood Securities, and Robinhood Crypto.”
`www.robinhood.com/us/en.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 11 of 48
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`Robinhood Markets, Inc., and an affiliate of Defendant Robinhood Securities, LLC. It is an
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`“introducing” broker-dealer, offering brokerage services to retail investors and allowing
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`customers to open online accounts and electronically deposit funds. It is a named party to the
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`Robinhood Terms & Conditions Agreement governing Robinhood’s website and mobile
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`applications. It is also a party to the Robinhood Customer Agreements,10 governing the purchase,
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`sale, or carrying of securities or contracts relating thereto and/or the borrowing of funds.
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`Defendant Robinhood Financial LLC facilitated, participated in, and communicated the PFOF
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`misrepresentations and omissions to Plaintiffs and Class members and concealed their detrimental
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`effect on the execution prices Plaintiffs and Class members realized on their trade orders.
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`26.
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`Defendant Robinhood Securities, LLC is a full-service securities firm incorporated
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`in Delaware with its principal place of business located at 500 Colonial Center Parkway, Suite
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`100, Lake Mary, Florida 32746. It is a wholly owned subsidiary of Defendant Robinhood
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`Markets, Inc., and an affiliate of Defendant Robinhood Financial LLC. Once a customer creates
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`an account with Robinhood Financial LLC, Defendant Robinhood Securities is the custodian of
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`customers’ funds and the securities customers purchase. It services customer accounts; executes,
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`clears, and settles customer trades; prepares and distributes customer account statements and trade
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`confirmations; and extends credit to customer margin accounts. It is a party to the Robinhood
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`Customer Agreements governing the purchase, sale, or carrying of securities or contracts relating
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`thereto and/or the borrowing of funds, which transactions are cleared through it. Defendant
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`Robinhood Securities, LLC facilitated, participated in, and communicated the PFOF
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`Current version available at
`https://cdn.robinhood.com/assets/robinhood/legal/Customer%20Agreement.pdf.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`misrepresentations and omissions to Plaintiffs and Class members and concealed their detrimental
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`effect on the execution prices Plaintiffs and Class members realized on their trade orders.
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` FACTUAL BACKGROUND
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`27.
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`Robinhood is a privately-owned retail financial services company that offers
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`customers the ability to invest in stocks, ETFs, options, and cryptocurrency through its website
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`and mobile application. Robinhood is a registered broker-dealer and a member of FINRA.
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`28.
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`Since its launch in 2015, the Company has grown into a multi-billion dollar
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`enterprise and is one of the largest retail broker-dealers in the United States. In October 2016
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`Robinhood reported 1 million users; by April 2017 its active user base had doubled and was
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`growing at a rate of 140,000 new accounts per month. As of October 2018, Robinhood’s users
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`had “executed more than $150 billion in transactions.11 In 2020, the Company topped 13 million
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`users and was valued at over $11 billion.12
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`29.
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`Robinhood heavily markets their investment platform to young adults and novice
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`investors and their customer base skews towards the young and inexperienced: The median age
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`11
`Simone Foxman, Julie Verhage, and Suzanne Woolley, Robinhood Gets Almost Half Its
`Revenue in Controversial Bargain With High-Speed Traders, Bloomberg.com (Oct.15, 2018),
`available at https://www.bloomberg.com/news/articles/2018-10-15/robinhood-gets-almost-half-
`its-revenue-in-controversial-bargain-with-high-speed-traders (last visited Feb.19, 2021).
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`12
`Richard Henderson and Miles Kruppa, Retail trading app Robinhood’s value tops $11bn
`on new fundraising, Financial Times (Aug. 17, 2020), available at
`https://www.ft.com/content/b208cbbe-579c-4cbf-9358-01ae02b4381b (last visited Feb.19,
`2021).
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 13 of 48
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`of a Robinhood user is thirty-one and a substantial number of their thirteen million users are first-
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`time traders.1314
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`30.
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`Robinhood encourages its largely unsophisticated customer base to trade
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`frequently, most notably by promising “commission-free investing” and “unlimited commission-
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`free trades in stocks, funds, and options.”15 Robinhood has heavily promoted the fact that it does
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`not charge trade commissions in its marketing materials.
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`How Robinhood Makes Money
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`31.
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`Robinhood’s primary source of revenue throughout the Class Period was PFOF16
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`generated by selling order flow to a group of Trading Partners: private “market makers,” broker-
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`dealers, and hedge funds.
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`32. When a customer places an order, Robinhood typically routes that order to
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`Robinhood Securities for clearing and further routing to a Trading Partner. That firm then may
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`“internalize” the client order by filling the order with its own inventory or matching it with a
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`different client’s opposing order. Alternatively, the Trading Partner may turn to external venues
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`like national stock exchanges (i.e., the New York Stock Exchange and Nasdaq Stock Market),
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`Massachusetts Complaint at 9.
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`Robinhood Raises $280 Million in Series F Funding Led by Sequoia,
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`Blog.Robinhood.com (May 4, 2020), available at
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`https://blog.robinhood.com/news/2020/5/4/robinhood-raises-280-million-in-series-f-funding-led-
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`by-sequoia (“Half of new Robinhood customers this year were first-time investors.”).
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`https://robinhood.com/; https://robinhood.com/signup.
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`16
`During a some or all of the Class Period, Robinhood also generated revenue by collecting
`interest from loans to margin accounts and from customers’ uninvested cash balances, as well as
`from subscriptions to “Robinhood Gold,” a premium version of the platform.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 14 of 48
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`regional stock exchanges, electronic communications networks (i.e., a decentralized computer-
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`based network that facilitates trades without traditional intermediaries), third market makers (i.e.,
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`dealers that buy and sell orders even if there is not a buyer or seller immediately available for the
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`other side of a transaction), and other alternative trading systems.
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`33.
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`Firms like the Trading Partners offer incentives to broker-dealers like Robinhood
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`to route order flow to them. These firms benefit from the additional liquidity order flow provides
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`and realize profits by exploiting the “dealer’s turn,” or the practice of buying at the bid price and
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`selling at the offer. In other words, market makers incur up-front costs by paying to trade with
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`retail stock investors, but nevertheless turn a hefty profit by pocketing the difference of the bid-
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`ask spread.17
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`34. When Robinhood first began operations in 2015, it relied on a single firm to
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`provide clearing and order-execution services. That firm routed customer orders on to some of
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`the Trading Partners in exchange for PFOF and shared a portion of that revenue with Robinhood.18
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`35.
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`Beginning in 2016, Robinhood stopped relying on that firm and began routing
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`orders directly to the Trading Partners.19
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`Another manner in which retail brokers benefit at the expense of retail investors’ best
`interests is by “flagging” their clients’ orders as retail. Some trading partners pay brokers to flag
`their clients’ orders as “retail” and charge fees to market participants, commonly high frequency
`traders, for access to such information through proprietary data feeds. Ordinary retail customers,
`however, receive no compensation for their orders being flagged. Meanwhile, high frequency
`traders or other market actors that subscribe to the feeds may use this information asymmetry to,
`for example, strategically execute against retail orders when their computerized trading models
`foresee shifts in the market for a given security.
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`Cease and Desist Order at 5.
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`Id.
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`______________________________________________________________________________________
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`CLASS ACTION COMPLAINT
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`Case 4:21-cv-02010-YGR Document 1 Filed 03/23/21 Page 15 of 48
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`36.
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`In or around May 2016, Robinhood began negotiating the terms of its order flow
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`arrangements with the Trading Partners. During those negotiations, Robinhood and the Trading
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`Partners reached an agreement regarding how to allocate the compensation for order flow.20
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`37.
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`Compensation for order flow can be paid to the originating broker-dealer directly
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`as PFOF or, on the other hand, the trading partner can obtain “price improvement” on trade
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`executions. “Price improvement occurs when a customer order receives an execution at a price
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`that is superior to the best available quotation then appearing in the public quotation feed,” the
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`national best bid/offer price (“NBBO”), and creates benefit to the customer because they receive
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`a better price than they would otherwise.21 “[M]ost broker dealers obtain price improvements on
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`the vast majority of customer orders that they send to principal trading firms.” 22
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`38.
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`PFOF, unlike price improvement, creates a conflict of interest between broker-
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`dealers like Robinhood and their customers because PFOF is a benefit that accrues to the broker-
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`dealer itself, and not the customer.23 A broker-dealer’s opportunity to provide price improvement
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`Cease and Desist Order at 6.
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`Cease and Desist Order at 4.
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`Id.
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`23
`See Letter from Sen. Carl Levin, Chairman of the Comm. on Homeland Sec. and
`Governmental Affairs’ Permanent Subcomm. on Investigations, to SEC Chairwoman Mary Jo
`White (Jul. 9, 2014), available at
`https://www.hsgac.senate.gov/imo/media/doc/Ltr%20to%20SEC%20Chairman%20White%20re
`%20Equity%20Market%20Structure%20(July%209%202014).pdf (“The system creates a
`conflict of interest for stock brokers who have a legal duty to seek best execution of their
`customer’s orders. [Paying for order flow] creates an incentive for brokers to route customer
`orders to venues that offer brokers the highest rebate, or conversely, away from venues that
`charge brokers the highest fee, even when those venues may not offer best execution. Academic
`and market research into order routing decisions suggest that th