Robinhood used strategies “such as gamification to encourage and entice continuous and repeated use of its trading application,” said the Massachusetts Securities Division’s enforcement arm, referring to elements of game play designed to drive user activity.
In a statement, Robinhood said it disagreed with the allegations in the complaint and intends to “vigorously” defend itself. The startup pointed to improvements that have been made to the range of options, additional safeguards and improved educational materials.
“Millions of people have made their initial investments through Robinhood, and we continue to focus on serving them,” the company said. “Robinhood is a self-driving broker-dealer and we do not make investment recommendations.”
Massachusetts regulators are pushing for a range of sanctions against Robinhood, including fines, an independent review of the platform, and compensation for investors who have suffered harm.
“Robinhood used advertising and marketing techniques aimed at younger individuals … with little or no investment experience,” said Massachusetts regulators.
There is no doubt that Robinhood’s free-trading business model has increased access to financial markets for new investors. That could increase the number of Americans exposed to a market boom like the current one.
A newbie investor made 12,700 trades in six months
Robinhood’s co-founders said they were “personally devastated by this tragedy” and in response announced a series of changes to the options offering and the user interface.
The Massachusetts indictment said Robinhood is “ruthlessly bombarding” users with gamification strategies, including “colorful confetti raining down” on their screens after executing transactions.
Regulators also pointed out how Robinhood rewarded customers who worked with the app on a daily basis by putting them on a waiting list for a new product, a cash management feature.
The complaint was about how often newbie investors traded, suggesting that the app is more used by some for short-term trading than long-term investing.
For example, regulators found at least 670 Robinhood clients with limited or no investment experience who made an average of at least five trades per day. And in one example, a customer with no previous experience was able to complete more than 12,700 transactions in just six months.
‘Plagued’ by dropout
At the same time, the Robinhood system has collapsed under the pressure of the trade boom.
Robinhood “knew or should have known” that its infrastructure “was unable to support its burgeoning customer base,” said regulators.
In his statement, Robinhood defended efforts to strengthen his system.
“Over the past few months,” said the company, “we’ve worked hard to make sure our systems are scalable and available when people need them.”