Robinhood is ruthlessly taking part in with funding, says a Massachusetts official
Robinhood stock trading app has been accused of employing ruthless, exploitative business tactics with its millennial clientele.
“The worst part of what you are doing is clearly how you are playing the idea of investing,” William Galvin, Commonwealth Secretary of Massachusetts, told CNBC’s Squawk Alley on Wednesday.
“This is a very ruthless company when it comes to these investors. They are interested in expanding their market base, they are not interested in serving their investors,” Galvin said.
Galvin spoke to CNBC after Massachusetts regulators filed a complaint against Robinhood accusing the trading app of predatory marketing to inexperienced investors.
The complaint cites Robinhood’s “aggressive tactics to attract inexperienced investors, his use of gamification strategies to manipulate customers and his failure to prevent frequent outages and disruptions on his trading platform”. The complaint marks the first enforcement of the Massachusetts escrow rule, which Galvin began enforcing in September.
Robinhood denied the allegations.
“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 think they are. They basically have the experience of the trade, but it’s a reckless experience because of the way Robinhood treats them has, “he said.
“It markets itself to them as a device they can get rich with without the expertise or skills,” added Galvin.
“They’re taking unsophisticated investors, most of whom are inexperienced, and they’re basically making this a game, causing them to lose money. You’re putting them on board of something these people have absolutely no idea about,” he said .
Robinhood and other online brokers saw record growth in 2020 due to the unprecedented volatility of the Covid-19 pandemic. Robinhood saw a record 3 million new customers in the first four months of 2020 as the coronavirus pandemic disrupted markets and plunged the economy into recession.
The coronavirus downturn spurred young people – in some cases for the first time in their lives – to start investing. Robinhood’s client inflow showed that young and inexperienced investors viewed March market as an entry point to investing, especially as many were stuck at home during the statewide lockdown.
“The pandemic contributed to its growth,” said Galvin. “People who operate from home are easier to reach, more tempted to go online and do day-to-day business. They have taken in an audience of very unsophisticated people and taken advantage of them.”
The app spokesperson replied, “Robinhood is a self-directed brokerage dealer and we do not make investment recommendations. We have worked diligently over the past few months to make sure our systems are scaled and available when people need them. Us Us have also significantly improved our options offering by adding safeguards and improved educational materials. Millions of people have made their first investments through Robinhood and we continue to focus on serving them. “
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