Florida Attorney General Investigates Robinhood Crypto Over PFOF Costs

Robinhood Crypto is currently under investigation by the Florida Attorney General's office for allegedly misleading customers about the costs associated with crypto trading on its platform. The investigation focuses on claims that Robinhood's payment for order flow (PFOF) model results in higher expenses for users compared to other trading platforms. This development comes as regulatory scrutiny of the crypto industry intensifies, highlighting potential deceptive practices within the sector.

The Attorney General's office has indicated that there is evidence suggesting that trading on Robinhood is more expensive than on competing platforms. This allegation is centered around Robinhood's PFOF model, which involves the platform receiving payments from market makers for routing orders to them. Critics of this model argue that it can lead to higher costs for traders, as the platform may not always execute trades at the best available prices. The investigation aims to determine whether Robinhood has been transparent with its users about these costs and whether the platform's marketing claims about being the "least expensive way to purchase crypto" are accurate.

At the heart of the Attorney General's allegations is the PFOF business model, which allows Robinhood to offer commission-free trading by generating revenue from routing customer trades through market makers in exchange for a cut of the profits. Critics have long complained that PFOF presents an inherent conflict of interest, potentially incentivizing the company to route customers’ trades through the market maker offering the most commission, rather than the one with the best price for customers. This model has been a subject of controversy, with some regulators and industry experts calling for its ban or reform.

In 2020, Robinhood paid $65 million to settle a U.S. Securities and Exchange Commission (SEC) enforcement action alleging that the company misrepresented the quality of its executions of customer trades. Robinhood did not admit or deny the SEC’s findings. Under former Chair Gary Gensler, the SEC considered banning PFOF but ultimately did not. PFOF is banned in the United Kingdom and will be banned in the European Union beginning next year. Robinhood CEO Vlad Tenev has long defended the practice, telling CNBC in 2023 that PFOF was “inherently here to stay.”

Robinhood Markets General Counsel Lucas Moskowitz has defended the platform's practices, stating that "Our disclosures are best-in-class — We disclose pricing information to customers during the lifecycle of a trade that clearly outlines the spread or the fees associated with the transaction and the revenue Robinhood receives. We are proud to be a place where customers can trade crypto at the lowest cost on average." However, the Attorney General's subpoena seeks a range of information from Robinhood, including documentation of how the platform determines pricing for transaction rebates or PFOF practices with market makers, documents containing comparative price analyses of other crypto exchanges, and documents relating to the sale or access of users’ crypto trading data. Robinhood has until the end of the month to respond to the subpoena.

The probe into Robinhood Crypto underscores the growing regulatory pressure on the crypto industry. As more individuals and institutions enter the market, regulators are increasingly focused on ensuring transparency and fairness in trading practices. The investigation into Robinhood's PFOF model is part of a broader effort to protect consumers from deceptive practices and to promote a more transparent and competitive market for crypto trading. The outcome of this investigation could have significant implications for Robinhood and other platforms that use similar business models, potentially leading to changes in how these platforms operate and disclose their fees to customers.