Robinhood Financial LLC is facing a renewed complaint in Florida over its payment for order flow arrangements with several market makers, including Citadel Securities, which allegedly worsened execution quality and harmed Robinhood’s customers.

The renewed complaint, seen by FX News Group, was filed with the Florida Southern District Court by Jim Antonio Alers. The plaintiff aims to represent the following class:

All former and current Customers of Robinhood in Florida, United States who traded on Robinhood’s platform within 4 years preceding the filing of this lawsuit (the “Class Period”).

The list of defendants includes Robinhood Financial, LLC, Citadel Securities, LLC, Apex Clearing Corporation, Two Sigma Securities, LLC, Wolverine Securities, LLC, and Virtu Financial, Inc. Robinhood is accused of breaching fiduciary duties, whereas the market makers are accused of aiding and abetting Robinhood’s breach of fiduciary duty.

According to the complaint, in or around May 2016, Robinhood began negotiations with a number of principal trading firms about potentially routing its customer orders to those entities. In the course of those negotiations, certain of the principal trading firms told Robinhood that there was a trade-off between payment for order flow on the one hand and price improvement on the other: If Robinhood negotiated for higher payment for order flow revenue, according to the principal trading firms, there would be less money available for the principal trading firms to provide price improvement to Robinhood’s customers.

From September 2016 through June 2019, while Robinhood allegedly was on notice that its high payment for order flow rates from principal trading firms could result in inferior execution prices for its customers, Robinhood violated its duty of best execution by failing to conduct adequate regular and rigorous reviews of the execution quality it was providing on customer orders.

The complaint explains that payment for order flow (PFOF) has the potential to create a conflict of interest between the broker-dealer and its customer because payment for order flow is a benefit that goes to the broker-dealer itself, whereas other incentives that may be obtained for routing order flow, such as price improvement, benefit the broker-dealer’s customers. A broker-dealer must not allow payment for order flow to interfere with its efforts to obtain best execution.

Robinhood is said to have negotiated a payment for order flow rate that was substantially higher than the rate the principal trading firms paid to other retail broker-dealers—which resulted in approximately a 20/80 split of the value between price improvement and payment for order flow. The complaint alleges that Robinhood explicitly offered to accept less price improvement for its customers than what the principal trading firms were offering, in exchange for receiving a higher rate of payment for order flow for itself.

In September 2016, Robinhood began routing customer orders directly and solely to principal trading firms. Around the same time, Robinhood formed a “Best Execution Committee” to monitor the speed and the prices at which the principal trading firms were executing Robinhood customer orders. The Committee met at least once per month and included Robinhood’s General Counsel.

From October 2016 through at least June 2019, the Committee observed that Robinhood was not obtaining much price improvement on its customer orders in equity securities, particularly on orders of 100 shares or more. By March 2019, Robinhood had conducted a more extensive internal analysis, which showed that its execution quality and price improvement metrics were substantially worse than other retail broker-dealers in many respects, including the percentage of orders that received price improvement and the amount of price improvement, measured on a per order, per share, and per dollar traded basis. Senior Robinhood personnel were aware of this analysis.

A more extensive analysis Robinhood conducted in March 2019 stated that “[n]o matter how we cut the data, our % orders receiving price improvement lags behind that of other retail brokerages by a wide margin.” Robinhood further found that the amount of price improvement obtained for Robinhood customers was far lower than at competing broker-dealers, measured on a per order, per share, and per dollar traded basis. Senior Robinhood personnel were aware of this analysis.

For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging.

The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.

According to the complaint, between October 2016 and June 2019 at least, certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.

The complaint says that the market makers knew that the arrangements between themselves and Robinhood violated fiduciary duty by placing Robinhood’s financial interests over that of its customers. Citadel Securities, LLC, Apex Clearing Corporation, Two Sigma Securities, LLC, Wolverine Securities, LLC, and Virtu Financial, Inc allegedly knew that by agreeing to what Robinhood was proposing, it would play a critical role in enabling Robinhood to carry out the agreement.

The plaintiff seeks a disgorgement of all profits obtained by the defendants as a result of the breach of fiduciary duty committed by Robinhood, as well as monetary damages to compensate Robinhood’s customers for the losses they suffered as a result of Robinhood’s failure to comply with its fiduciary duty of best execution.