What Best Execution Requires
The best execution standard requires brokers to consider multiple factors: price, speed of execution, likelihood of execution, and the overall quality of the result for the customer. PFOF arrangements compromise this analysis by creating a financial incentive to route to the highest-paying market maker — which may not be the best executor.
The Massachusetts Action
In 2020, Massachusetts Secretary of State William Galvin filed a complaint against Robinhood alleging it failed to maintain best execution policies and procedures. The complaint cited Robinhood's near-exclusive reliance on PFOF arrangements and its failure to adequately monitor execution quality. Massachusetts settled the matter for $7.5 million — one of the first significant state-level best execution enforcement actions against a PFOF-dependent broker.
FINRA Enforcement History
FINRA has brought multiple enforcement actions against broker-dealers for best execution failures related to PFOF arrangements. In 2021, Robinhood Financial paid $70 million in total penalties to FINRA — the largest fine in FINRA history at the time — including charges related to best execution failures. Citadel Securities itself has paid FINRA fines for supervisory and market-making practice violations.
What Regulators Should Do
Critics argue that the existing best execution framework is inadequate because it focuses on individual orders rather than the systemic conflict created by PFOF. Meaningful reform would require either banning PFOF outright (as the UK and Canada have done) or mandating a competitive order routing process that prevents any single market maker from acquiring a dominant position through payment arrangements.