Stock app Robinhood has been accused of reckless, exploitative business tactics on its millennial clientele.
“The worst part of what they are doing is clearly the way they gamify the idea of investing,” William Galvin, the Secretary of the Commonwealth of Massachusetts, told CNBC’s “Squawk Alley” on Wednesday.
“This is a very reckless company when it comes to these investors. They are interested in expanding their market base, they are not interested in serving their investors,” said Galvin.
Galvin spoke to CNBC after Massachusetts regulators filed a complaint against Robinhood, accusing the trading app of predatory marketing on inexperienced investors.
The complaint refers to Robinhood’s “aggressive tactics to attract inexperienced investors, using gamification strategies to manipulate clients, and not avoiding frequent outages and disruptions on its trading platform.” The complaint is the first enforcement of Massachusetts’ fiduciary rule, which Galvin began enforcing in September.
Robinhood dismissed the charges.
“We disagree with the allegations in the Massachusetts Securities Division’s complaint and intend to vigorously defend the company,” a Robinhood spokesman told CNBC.
Galvin said inexperienced investors need protection.
“What we really want to make sure is that these people are treated fairly. We don’t believe they are. They actually have the experience of trading, but it’s a reckless experience because of the way Robinhood has treated them” , he said. .
“It markets itself as a means of getting rich without having the expertise or the skill,” Galvin added.
“They take straightforward investors, most of whom have no experience, and basically turn it into a game, causing them losses. They’re putting them on board something that these people have absolutely no idea about,” he said.
Robinhood, along with other online brokers, have seen record growth in 2020 due to the unprecedented volatility of the Covid-19 pandemic. Robinhood recorded a record 3 million new customers in the first four months of 2020, as the coronavirus pandemic shook the markets and plunged the economy into recession.
The downturn of the coronavirus prompted young people – in some cases for the first time in their lives – to get started investing. The influx of clients from Robinhood showed that young and inexperienced investors saw the March market routine as a starting point to invest, especially as many stayed at home during the nationwide lockdown.
“The pandemic contributed to their growth,” said Galvin. “People who operate remotely from their homes are easier to reach, more tempted to go online with this, to do day trading. They’ve taken an audience of very unaffected people and exploited it.”
The app spokesperson commented: “Robinhood is a self-driving broker-dealer and we do not make investment recommendations. Over the past few months, we have worked hard to ensure that our systems are scalable and available when people need them. We also have significant made improvements to our range of options, adding precautions and enhanced educational materials. Millions of people have made their first investments through Robinhood, and we continue to focus on serving them. ”
Subscribe to CNBC PRO for exclusive insights and analysis, and live programming of working days from around the world.