Robinhood used strategies “such as gamification to encourage and entice continuous and repetitive use of its trading application,” the enforcement arm of the Massachusetts Securities Division said, referring to elements of game playing designed to boost user activity.
In a statement, Robinhood said it disagrees with the allegations in the complaint and plans to “vigorously” defend itself. The startup pointed to improvements made to its options offering, additional safeguards and enhanced educational materials.
“Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them,” the company said. “Robinhood is a self-directed broker-dealer and we do not make investment recommendations.”
Massachusetts regulators are seeking a range of sanctions on Robinhood, including fines, an independent review of the platform and compensation to investors who have been harmed.
“Robinhood used advertising and marketing techniques that targeted younger individuals…with little, if any, investment experience,” the Massachusetts regulators said.
There’s no doubt that Robinhood’s free-trading business model has boosted access to financial markets among first-time investors. That can increase the number of Americans have exposure to market booms, such as the current one.
One newbie investor made 12,700 trades in six months
Robinhood’s co-founders said they were “personally devastated by this tragedy” and announced a series of changes to its options offering and user interface in response.
The Massachusetts complaint said Robinhood “relentlessly bombards” users with gamification strategies, including “colorful confetti raining down” on their screens after executing trades.
Regulators also pointed to how Robinhood rewarded customers who interacted daily with the app by moving them up on a waitlist for a new product, a cash management feature.
The complaint took issue with how frequently newbie investors traded, suggesting the app being used by some more for short-term trading than long-term investing.
For instance, regulators found at least 670 Robinhood customers with limited or no investing experience who averaged at least five trades per day. And in one example, a customer with no previous experience was able to make more than 12,700 trades in just six months.
‘Plagued’ by outages
At the same time, Robinhood’s system has buckled under the strain of the trading boom.
Robinhood “knew or should have known” its infrastructure was “incapable of supporting its rapidly expanding customer base,” regulators said.
In its statement, Robinhood defended efforts to bolster its system.
“Over the past several months,” the company said, “we’ve worked diligently to ensure our systems scale and are available when people need them.”