Secretary of the Commonwealth of Massachusetts William Galvin has filed a complaint against popular trading platform Robinhood Financial for targeting inexperienced investors and using so-called gamification strategies to manipulate its customers.
The complaint by Secretary Galvin’s securities division is the first enforcement action under the Massachusetts fiduciary rule he began enforcing in September, according to a statement from his office Wednesday. Robinhood uses aggressive marketing tactics on younger people, giving inexperienced investors the ability to make a potentially unlimited number of trades — and without properly screening them for options trading, Galvin alleged.
Robinhood earns revenue for trades executed by its customers, who have a median age of 31, according to Galvin’s statement. About 68 percent of the company’s Massachusetts customers approved for options trading have limited or no investment experience, the state’s securities division alleged in the complaint, dated December 16. Robinhood uses elements of game playing as a marketing technique to engage customers, the state regulators alleged.
“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said in the statement. “Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts.”
The nearly half a million Robinhood accounts in the state were this month valued at more than $1.6 billion, according to Galvin. The company has seen rapid growth in recent years, with its total number of accounts jumping 30 percent during the first five months of 2020 to about 13 million, his complaint said.
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Robinhood lures new customers with “free stock” and uses advertising that involves young actors and messaging aimed at inexperienced investors, according to the allegations in the complaint. For example, the lawsuit cited an advertisement that allegedly involved a clip of young person who said, “I’m a broke college student and investments might help my future tremendously.”
The company has allowed thousands of inexperienced investors to engage in “very risky” trading, using gamification strategies to entice repetitive activity, Galvin’s office alleged in the complaint. One customer with no investment experienced allegedly executed more than 12,700 trades in just over six months, according to the allegations.
Last year Robinhood rolled out a cash management feature with an “early access waitlist,” using gamification to reward customers who interacted daily with the trading application by improving their position on the list, according to the complaint.
“Confetti rains down on the screen of the app after each trade and customers are encouraged to interact with the app repeatedly to move up a waitlist for early access to new products,” Galvin’s office said in its statement.
Secretary Galvin also accused Robinhood of failing to prevent frequent outages and disruptions on its trading platform.
The complaint cites as many as 70 disruptions and outages this year through November, including at least seven that allegedly hampered the ability of customers to access their accounts or buy and trade securities. One such outage that prevented customers from trading occurred in March as stocks were plunging, according to the complaint.
The disruption on its trading platform follows tremendous growth in recent years, including a 500 percent increase in the number of accounts from 2016 to October 2018, the document says.
“Robinhood knew or should have known that its infrastructure of its trading platform was not sufficient to support its rapidly expanding customer base,” Galvin’s office alleged in the complaint.
Massachusetts regulators are seeking an “administrative fine” along with an order requiring Robinhood to engage an independent compliance consultant to review its platform, policies and procedures, according to the state secretary’s statement. Efforts to reach Robinhood for comment on the complaint were not immediately successful.
