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US state charges stocks app Robinhood for luring the inexperienced

·2-min read
Robinhood has seen popularity surge amid a rollercoaster ride for US stocks during the coronavirus pandemic

The US state of Massachusetts on Wednesday announced charges against stock trading app Robinhood, saying it had lured in inexperienced users and allowed them to trade in risky instruments like options without proper education.

Launched in 2013, Robinhood has seen a surge in popularity this year amid a wild ride for US stocks, which crashed as the Covid-19 pandemic struck in March but have lately been hitting new records thanks to massive liquidity from the Federal Reserve as well as hopes for vaccines.

The app also faced scrutiny after a young trader last June took his own life after his Robinhood account showed a negative balance of $730,000 based on options trades -- a reading his family believes was erroneous.

The complaint by Massachusetts Commonwealth Secretary William F. Galvin said Robinhood had employed risky tactics to lure in young traders, allowed them to make trades without any certification and failed to keep the app running consistently.

"As a broker-dealer, Robinhood has a duty to protect its customers and their money," Galvin said in a statement. "Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts."

The complaint, filed under a state rule, seeks a fine as well as for Robinhood to seek a review of its policies from an independent consultant.

In its statement, the state said approximately 68 percent of Massachusetts residents approved for options trading had "limited or no investment experience," and that the app has nearly half a million users in the state with accounts valued at more than $1.6 billion.

Noting the company allows unlimited trades and earns revenue from each one, the statement said Robinhood "employs gamification strategies to lure customers into consistent participation and engagement," including raining confetti down on the screen after each transaction.

It also said the company experienced 70 outages from the start of the year through November, including periods in March when the Dow Jones Industrial Average experienced a massive surge as well as during a crash when the virus intensified.

cs/st