The stock quote application Robinhood is being accused of reckless and exploitative business tactics to its millennial clientele.
“The worst aspect of what they do is clearly the way they play the idea of investing,” Massachusetts Commonwealth Secretary William Galvin said Wednesday on CNBC’s “Squawk Alley”.
“This is a very reckless 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 lawsuit against Robinhood, accusing the commercial application of predatory marketing to inexperienced investors.
The complaint cites Robinhood’s “aggressive tactics for attracting inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to avoid interruptions and frequent disruptions to its trading platform.” The complaint is the first application of the Massachusetts Fiduciary Rule, which Galvin began enforcing in September.
Robinhood denied the allegations.
“We disagree with the allegations of the Massachusetts Division of Securities and we intend to vigorously defend the company,” a Robinhood spokesman told CNBC.
Galvin said inexperienced investors need protection.
“What we really want to make sure of is that these people are treated fairly. We don’t think they are. They basically have the experience to negotiate, but it’s a reckless experience because of the way Robinhood has treated them,” he said. . .
“It’s marketed by themselves as a device by which they can get rich without having the experience or the skill,” Galvin added.
“They take unsophisticated investors, most of whom have no experience, and they basically turn it into a game, causing them to suffer losses. They bring them on board about something these people have no idea about,” he said.
Robinhood, along with other online brokers, have experienced record growth in 2020 due to the unprecedented volatility of the Covid-19 pandemic. Robinhood recorded a record 3 million new customers during the first four months of 2020, when the coronavirus pandemic rocked markets and launched the economy into a recession.
The coronavirus recession encouraged young people (in some cases, for the first time in their lives) to start investing. Robinhood’s influx of customers showed that young and inexperienced investors saw the market diversion in March as an entry point to investment, especially with many trapped at home during the national close.
“The pandemic has contributed to its growth,” Galvin said. “People who operate remotely from home, who are easier to access, are more attractive to connect with, to engage in day-to-day business. They’ve taken an audience of very unsophisticated people and exploited them. “.
The app spokesperson responded, “Robinhood is a self-directed broker-dealer and we don’t make investment recommendations. Over the past few months, we’ve worked diligently to ensure our systems scale and be available when people need them. “We have also made significant improvements to our range of options, adding guarantees and improved educational materials. Millions of people have made their first investments through Robinhood and we remain focused on continuously serving them.”
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