Robinhood accused of targeting novice investors with features that encourage excessive trading

Online brokerage Robinhood Financial is targeting young, inexperienced investors and pushing them to make thousands of trades on its platform, Massachusetts securities regulators claim in a lawsuit filed on Wednesday. Although Robinhood markets itself as millennials’ gateway to the stock market, the company uses “gaming strategies to manipulate customers” to trade […]

Online brokerage Robinhood Financial is targeting young, inexperienced investors and pushing them to make thousands of trades on its platform, Massachusetts securities regulators claim in a lawsuit filed on Wednesday.

Although Robinhood markets itself as millennials’ gateway to the stock market, the company uses “gaming strategies to manipulate customers” to trade more in order to boost its fees, according to the suit.

“For example, one such advertisement contains a clip of a young adult stating, ‘I’m a broke college student, and investments might help my future tremendously,'” the lawsuit states. “In another example, another young adult says, ‘I didn’t know anything about investing before I started using Robinhood. As soon as I set up my account, I had a free stock, so I immediately was an investor’.”

“Colorful confetti”

To further coax customers of its platform into trading, Robinhood rewards users “with colorful confetti raining down their screens after executing trades,” according to court documents. These and other tactics are Robinhood’s way of turning serious investing into a game, Massachusetts Secretary of the Commonwealth Willian Galvin said in a statement. These tactics are “not only unethical, but also falls far short of the standards we require in Massachusetts,” he said. 

Robinhood did not respond to requests for comment. A lawyer for Robinhood didn’t respond to an email seeking comment.

The company lets users to transfer money from their bank account to a Robinhood account and then start buying and selling stocks for free. The app launched in 2013 and now has more than 13 million users. That includes nearly 500,000 users in Massachusetts with combined assets of $1.6 billion, court documents state.

Massachusetts said in its complaint that Robinhood makes money through a so-called “payment for order flow.” In that process, Robinhood takes a user’s stock order and sells it to a larger brokerage firm that executes the purchase. Under this system, state regulators argue that the more trades Robinhood users execute, the more money the company receives from brokerages.

State regulators allege that Robinhood’s tactics resulted in hundreds of users making thousands of trades. “As one example, Robinhood allowed a customer with no investment experience to make more than 12,700 trades in just over six months,” the lawsuit claims.

Galvin is asking a state court to levy an undisclosed amount of fines on Robinhood. Regulators also wants a judge to order Robinhood to find an independent consultant to evaluate the app and company policies. 

String of negative publicity

The Massachusetts lawsuit follows a rash of negative publicity lately for Robinhood. Last year, a glitch in the company’s system allowed users to borrow an unlimited amount of money for trading. Massachusetts regulators also pointed to major outages the app experienced earlier this year. 

Robinhood’s platform crashed in March, temporarily preventing users from accessing their funds. The outage occurred on the same day the Dow Jones Industrial Average notched a one-day historic gain of roughly 1,290 points. Federal regulators are now investigating why the outage happened, Bloomberg reported. 

In June, a Robinhood user from Illinois died by suicide after his account erroneously showed a negative $730,000. In October, an undisclosed number of accounts were hacked and users complained that they couldn’t reach Robinhood customer service to get their issues fixed. 

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