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Robinhood Investigated for Unethical Business Practices
Robinhood, the very popular securities trading platform, is alleged to have aggressively marketed its services to inexperienced investors. The Massachusetts Security Division claims the company violated state laws and exposed investors to "unnecessary trading risk." Broker-dealers are supposed to act "in their clients’ best interest." The trading platform provides incentives for frequent use and churning of accounts allowing those with limited or no experience to engage in highly complex and risky trades. According to the complaint, William Galvin, Secretary of the Commonwealth of Massachusetts, stated, "Robinhood's platform is presented as some sort of game that you might be able to win." Customers are being encouraged to trade stocks constantly, what is called in the complaint "gamification." In other words, Robinhood attempts to turn stock trading into a fun activity that changes customers’ behavior resulting in frequent trades. Their daily newsletter, Robinhood Snacks, encourages frequent trading. The company allowed one customer to make 12,700 trades in a little over 6 months. Many more established investors understand the tax implications and benefits of buy and hold.
Robinhood has over 13 million accounts and claims that customers trade for free. In 2019, the firm agreed to pay $1.25 million to settle claims from the Financial Industry Regulatory Authority (FINRA) that it did not take steps to get the best prices for customers’ orders. Robinhood claims it is 'free' however, it makes money by payment for order flow. This means they send orders to be executed by trading firms in return for cash payments. These activities are not typical for broker-dealers and raise 'red flags' about the integrity of the business model. Massachusetts regulators state that a broker-dealer has a "duty of loyalty to its customers." Robinhood allegedly approved customers to trade options without the necessary qualifications to trade. According to the complaint, "68% of Massachusetts-based Robinhood customers were approved for options trading after reporting limited or no investing experience." The allegations against Robinhood provide many questions about the concern for the welfare of their customers.
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