Robinhood used strategies “such as gamification to encourage and attract continued and repetitive use of its trading application,” said the Massachusetts Division of Securities application group, which referred to game elements designed to increase user activity.
In a statement, Robinhood said it disagrees with the allegations in the complaint and plans to defend itself “vigorously.” The startup noted improvements made to its options, additional guarantees and improved educational materials.
“Millions of people have made their first investments through Robinhood, and we stay focused continuously on serving them,” the company said. “Robinhood is a self-directed broker-dealer and we don’t make investment recommendations.”
Massachusetts regulators are seeking a series of sanctions against Robinhood, including fines, an independent review of the platform and compensation to investors who have been harmed.
“Robinhood used advertising and marketing techniques aimed at younger people … with little investment experience, if any,” Massachusetts regulators said.
There is no doubt that Robinhood’s free trade business model has boosted access to financial markets among first-time investors. This may increase the number of Americans who are exposed to market booms, such as the current one.
A novice investor made 12,700 trades in six months
Robinhood co-founders said they were “personally devastated by this tragedy” and announced a number of changes to their choice of options and user interface in response.
In the Massachusetts complaint, Robinhood was said to “relentlessly bombard” users with gamification strategies, including “rainy colored confetti” on their screens after running operations.
Regulators also noted how Robinhood rewarded customers who interacted daily with the app by moving them on a waiting list for a new product, a cash management feature.
The complaint questioned how often novice investors traded, suggesting that the app be used by some more to operate in the short term than long-term investments.
For example, regulators found at least 670 Robinhood customers with limited or no investment experience and who averaged at least five daily trades. And in one example, a customer with no prior experience was able to perform more than 12,700 transactions in just six months.
“Plagued” by interruptions
At the same time, the Robinhood system has shrunk under the strain of the trade boom.
Robinhood “knew or should have known” that its infrastructure was “unable to support its rapidly expanding customer base,” regulators said.
In his statement, Robinhood defended efforts to strengthen his system.
“Over the last few months,” the company said, “we have worked diligently to ensure our systems are on scale and available when people need them.”