January 25, 2021

US state regulator says Robinhood is “aggressively marketing” to novices

A US state regulator has called out trading app Robinhood for “aggressively marketing” its services to inexperienced traders, the Wall Street Journal reports.

The Massachusetts Securities Division has drafted a 20-page complaint which says Robinhood, valued at $11.7 billion, is exposing  investors to “unnecessary trading risks”.

The fintech claims to “democratise” access to stocks, exchange-traded funds and options, as well as cryptocurrency buying and selling.

Robinhood screen

The regulator calls out Robinhood’s approach of “gamifying” trading

Revenue over customers

But now the US regulator accuses the fintech of violating state laws and regulations. The complaint alleges Robinhood “prioritised its revenue over the best interest of its customers.”

It also calls out Robinhood’s approach of “gamifying” trading, which lures in novices and encourages unhealthy, repeated engagement with the platform.

To fix this, the regulator wants the stock trading app to fix its policies around options trading – one of its more risky services.

In June, this service led to a student committing suicide. He thought he was in more than $700,000 of debt. The 20-year-old, Alex Kearns, was victim to a temporary blip before the contract executed – meaning he was in no such debt.

The Massachusetts Securities Division also demands the fintech pay a fine. And wants Robinhood to source outside help to fix its outages. Of which there have been a number, the worst spurring a large class action lawsuit.

A Robinhood spokeswoman told the WSJ it is committed “to operating with integrity, transparency, and in compliance with all applicable laws and regulations”.

Valuation keeps climbing

In September, Robinhood bagged $460 million just one month after it landed a $200 million Series G.

The fresh capital put Robinhood’s valuation at $11.7 billion, an increase of $700 million since August.

The fintech claimed it would used the more than half a million funding to improve its customer experience.

Outages

This year, the fast-growing start-up has run into a host of technical challenges. In March, it suffered three separate outages – one of which locked its then some ten million users out of trading for an entire day.

The fintech now faces a class action lawsuit based out of California, the recent combination of three different lawsuits waged by angry customers.

These technical issues haven’t gone away. In September, Robinhood fell into technical difficulties alongside three other digital trading apps.

This is despite promises by the start-up’s founders that it’s trying to improve the capacity its infrastructure can take.

SEC probe into deal disclosures

Not only has Robinhood fallen into hot water this year over detrimental technical issues, it is also now under investigation for its deal disclosures.

According to WSJ sources, the Securities and Exchange Commission (SEC) could levy a civil fraud penalty against Robinhood of up to $10 million, depending on the outcome. This adds to the fine the Massachusetts Securities Division now demands.

The probe follows the start-up’s failure to fully disclose its tactic of selling orders to high-speed trading firms.

The process, called a “payment for order flow”, is used by retail brokerages like Robinhood. They use it to execute trades in exchange for sending them client orders.

Until 2018, Robinhood did not list this practice on a webpage dedicated to explaining how its business model made money.

Its new webpage states that the firm “receives rebates from executing brokers”. In October 2018, when it changed the page, co-founder Vladimir Tenev posted a blog entry about payments to high-speed firms.

Read next: Robinhood’s valuation continues climb with $460m funding