Robinhood has lured novice investors to its free trade program with game elements such as colorful confetti and other aggressive advertising methods, Massachusetts security regulators accused Wednesday.
The 24-page complaint accuses Robinhood-focused Milinnial of violating state law and regulations by failing to take steps to protect its customers and failing to protect its system from the explosive growth that led to many outbreaks and disruptions by 2020.
What Has Robinhood Done?
Robinhood has used the strategy “such as gamification to encourage and entice continuous and repetitive use of its trading application”, the Massachusetts Securities Division’s law enforcement agency said, referring to toys designed to boost user activity.
In a statement, Robinhood said it did not agree with the allegations in the complaint and planned “strongly” to defend itself. The initiative is pointing to improvements made in its selection of options, additional protection and improved building materials.
“Millions of people have made their first investment in Robinhood, and we are always focused on working for them,” the company said. “Robinhood is a reseller and we do not make investment recommendations.”
Massachusetts regulators demanded further sanctions on Robinhood, including fines, independent speaker reviews and compensation for injured investors.
The trading app has already emerged as one of the winners of this apndemic. Robinhood added 3 million funded accounts between January and April alone, a rapid growth of 30%. The startup has completely disrupted the online commerce industry, and its estimates in the private market have reached $ 11.2 billion.
“Robinhood has used advertising and marketing strategies aimed at young people … with little investment experience, if any,” Massachusetts regulators said.
Surge In Newbie Investors
There is no doubt that Robinhood’s free trading business model has increased access to financial markets among early investors. That could increase the number of Americans exposed to booms in the market, right now.
One newbie investor made 12,700 trades in six months
Recent events, however, have also drawn attention to the potential dangers of giving new investors easy access to rare financial instruments that are widely used by high-end market players.
In June, the family of a 20-year-old student said he died of suicide after being confused over a seemingly improper $ 730,000 in his Robinhood account. The student was using Robinhood to trade options and his family believes he was misled by the app interface.
Robinhood’s co-founders said they were “personally devastated by this tragedy” and announced a series of changes to its options offering and user interface in response.
The Massachusetts complaint said Robinhood “relentlessly bombards” users with gamification strategies, including “colorful confetti raining down” on their screens after executing trades.
Administrators also demonstrate how Robinhood rewards customers who interact daily with the app by moving them to the waiting list for a new product, a financial management feature.
The complaint has taken up the issue of how often newbie investors have traded, suggesting that the app is used by many in short-term trading rather than long-term investments.
For example, regulators find at least 670 Robinhood customers with limited or no investment experience that averages at least five trades a day. And in another instance, a customer with no prior knowledge was able to make more than 12,700 trades in just six months.
Excessive System Failures
At the same time, Robinhood’s system has collapsed under the weight of the trading boom.
Between January 1 and the end of November, Robinhood experienced 70 cracks or disruptions in its trading area, according to the complaint. One such shutdown occurred on March 3, preventing other Robinhood users from participating on the day when the S&P 500 received a $ 300 billion bond. Robinhood has been “overwhelmed by the end of problems or disruptions” every month by 2020, the complaint said.
Robinhood “knew or should have known” its infrastructure “could not support its rapidly growing customers,” regulators said.
In a statement, Robinhood defended efforts to strengthen its system.
“Over the past few months,” the company said, “we have worked diligently to ensure that our programs grow and become available when people need them.”