It has brought on board young, undercapitalized investors through a social media strategy of variable reward systems, dopamine dependency, and click-notification behavioral directives. But Robinhood has undeniably created an ecosystem that rewards frequent and risky trading. This frequency could be attributed to many factors. In the first three months of 2020, Robinhood traders bought and sold options contracts at eighty-eight times the rate of those at Charles Schwab. But, in the name of individual empowerment, Robinhood has removed almost all barriers to this risky, often leveraged, form of derivatives trading - and its customer base is hooked. Trading in the options market, for instance, is typically considered out of bounds for incoming investors, not out of paternalism but protectionism. The lawsuit claims the app deploys a gamified interface that pushes users to engage in advanced derivatives trading, short sales, and options calls. The app that built its brand around sticking up for the entry-level investor, it turns out, has been picking their pockets in the shadows.īut possibly the most concerning part of the recent flurry came from Massachusetts regulators on December 16, alleging that Robinhood systematically preys on novice investors. The heist would have been a scandal even if it had hit America’s more capitalized investing class, but Robinhood’s clientele is different: the average account holder has a few thousand dollars at hand, is around thirty years old, and is more likely than not to be a first-time investor.
The SEC found that this latter fault cost users over $34 million - far exceeding any short-change savings they would have made on commissions costs. A similar charge was settled with the Securities and Exchange Commission (SEC) on December 17, with Robinhood forced to pay out $65 million for misleading customers about its revenue sources and failing to execute trades at quality prices. Most recent is the class action lawsuit, filed on December 24, that claims Robinhood offsets the costs of its commission-free calling card by reselling stock orders for backdoor fees. The app has been lauded by commentators for its mission to democratize finance - but as the New Year approached, the company found itself in hot water three times in just two weeks. A staggering 6 million chose to invest through Robinhood, the Silicon Valley start-up that pioneered commission-free trading back in 2013. Market researchers estimate that over 10 million Americans became first-time investors in 2020, amid record volatility.
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