[SAN FRANCISCO] Robinhood Financial was sued in a proposed class action for allegedly failing to inform clients that it was selling their stock orders to trading firms and effectively charging back-door commission fees.
The complaint filed Wednesday in San Francisco federal court follows the company's US$65 million settlement last week with the US Securities and Exchange Commission (SEC) over similar allegations.
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.
As part of the accord with the SEC, Robinhood agreed to have an outside consultant monitor its compliance by ensuring it follows rules requiring firms to provide best execution for trades.
Robinhood, which didn't admit or deny the regulator's claims, said at the time it is now fully transparent in its communications with customers about how it makes money.
Nora Chan, a Robinhood spokesperson, declined to comment.