Stock trading app Robinhood is being accused of reckless, exploitive business tactics on its millennial clientele.
“The worst aspect of what they do clearly is the way they are gamifying the idea of investing,” Massachusetts Secretary of the Commonwealth William Galvin told CNBC’s “Squawk Alley” on Wednesday.
“This is a very reckless company when it comes to these investors. They’re interested in expanding their market base, they’re 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 cites Robinhood’s “aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent 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 rejected the accusations.
“We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously,” a Robinhood spokesperson told CNBC.
Galvin said inexperienced investors need protection.
“What we really want to make sure is that these people are treated fairly. We do not believe they are. They are basically having the experience of trading, but it’s a reckless experience because of the way that Robinhood has treated them,” he said.
“It’s marketing itself to them as a device by which they can become wealthy without having the expertise or the skill,” Galvin added.
“They’re taking unsophisticated investors, most of whom have no experience, and basically making this into a game, causing them to suffer losses. They’re bringing them aboard on 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 from the Covid-19 pandemic. Robinhood posted a record 3 million new customers in the first four months of 2020 when the coronavirus pandemic roiled markets and threw the economy into a recession.
The coronavirus downturn spurred young people — in some cases, for the first time in their lives — to get started with investing. Robinhood’s inflow of clients showed that young and inexperienced investors saw the market rout in March as an entry point into investing, especially with many stuck at home during the nationwide lockdown.
“The pandemic has contributed to their growth,” said Galvin. “People operating remotely from their homes, being easier to reach, more enticed to go online with this, to engage in day trading. They have taken an audience of very unsophisticated persons and exploited them.”
The spokesperson for the app responded: “Robinhood is a self-directed broker-dealer and we do not make investment recommendations. Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them. We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials. Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them.”
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Source: Finance - cnbc.com
