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Robinhood 'has no economic interest in creating value for customers': Rep. Casten

Rep. Sean Casten (D-IL) joins Yahoo Finance Live to discuss his ‘Trading isn’t a Game Act’ and the future of trading platforms as Robinhood makes its public debut.

Video transcript

AKIKO FUJITA: For much more on some of the regulatory headwinds that the platform is likely to face moving forward, let's bring in Representative Sean Casten from Illinois. And of course, Congressman, we have you on here because you've introduced this bill, Trading Isn't a Game Act to really look at the gamification that some would say has happened in investing as a result of the popularity of the Robinhood platform. You've been listening to the CFO Jason Warnick there talking about his platform. What concerns do you have as you continue to see this grow?

SEAN CASTEN: Well, so I have a lot of concerns, and I think-- I mean, I think you heard the CFO say it. He said that we are a tech company first, and that's pretty clear. But you know, we have a responsibility as legislators to protect investors. And you know, I first became aware of this back in June of 2020 when Alex Kearns in Naperville, a city in my district, took his own life after his Robinhood account showed that he had lost over $700,000. He had $7,000 to his name. And in the course of the conversations with his family and digging in, came to appreciate that this is a business that at core has no economic interest in creating value for investors.

It makes money by getting you to come to their site by using the tricks that, you know, Facebook and YouTube and these other social media companies use to get you addicted and churn, keep spending money and then makes money on the back side as a proportion of how much money the market makers make on the back end. So they have an economic incentive to bring in money that is as uninformed as possible and sell it to people who are as sophisticated as possible. And you know, with respect for the CFO, who is going to become very wealthy today, that's not a model that other broker dealers are emulating because other broker dealers have recognized that there are such massive conflicts of interest there. And you know, when you-- you know, when you spend as much time with a family who is grappling with the fact that they lost their son because their son got too addicted to this platform and now the company is saying that we're a safety-first company, it's a bit disingenuous, to put it bluntly.

ZACK GUZMAN: Yeah, I mean, you famously, during that congressional hearing, kind of called up the Robinhood customer line there. And it only lasted 12 seconds and then went-- you know, basically ended the message. They've invested more in their customer service since then, have promised to do better on that front. The gamification piece of all this, though, is a little interesting because it's kind of difficult to-- they've also reined that in, too-- but it's difficult to kind of identify what is gamification, how it differs from the other brokerages out there, who you know, to be fair, have also emulated payment for order flow. There are a number of people doing that now.

But I mean, to you, which one's more important? And I know it's not necessarily an either-or here. But it sounds like from regulators, really focusing on payment for order flow, not just Robinhood but across the board, seems to be more pressing at the moment.

SEAN CASTEN: Well, you know, the-- and I encourage you, we actually had a really, really interesting, very bipartisan markup yesterday on financial services talking about this whole slew of issues, and you can't really separate the one from the other. You know, there's a value, I think, for payment for order flow, particularly for small, very illiquid commodities. But there's a tension for a company that has an obligation to look out for the best interests of its investors if your only money is coming from payment for order flow.

And when you staple that to these gamification features that are giving you essentially these little endorphin surges in your brain as you get drawn into higher-margin products-- so-- you know, so they've been pushing people. If you get into equities, it's really easy to click a button and then you can be drawn into options, where they're making three times as much per trade on those options-- really good for Robinhood, really good for their investors, really good for the downstream market makers like Citadel, really bad for the Alex Kearns of the world. And in the discussion we had yesterday-- and we haven't even grappled with all this.

We had this conversation yesterday, but there's a whole separate issue that the tools that these companies are using, these psychological nudges, are tools that Silicon Valley has developed for, you know, Farmville and Candy Crush and, you know, my own daughter plays a lot of Sim City, if I'm getting that right, and, you know, gets very excited about how many peas she has grown and, you know, these imaginary currencies. And if she wastes her time and loses imaginary money, OK, it's-- you know, it's fine. But when you're using those same tools to cause people to lose their real wealth or to put their real wealth at the risk of someone else, that's a problem that we've got to address.

AKIKO FUJITA: Yeah, Congressman, I thought it was interesting that Jason Warnick, the CFO there, said that Robinhood is a tech company first. And most would argue that it's fintech and not-- and the financial element comes before the technology. But you know, they had famously said that our platform has democratized investing. They have repeated that on the roadshow.

And to a certain point, you could argue that that has been true. It has brought in so many retail investors into the fold, onto their platform. Can you have both tracks here, where you've got easy access to investing but also have the safeguards in place? Or does that easy access inherently come with the risk that you've already highlighted?

SEAN CASTEN: Well, you know, look, I think the history of financial regulation going back to, you know, early investors and-- you know, in ships on the British coasts is this tension that you can-- if everybody has access to capital markets, then we have to spend a lot of time making sure that we protect a lot of people. And there's always a tension between, you know, democratization of capital market access and protecting those investors.

And the folks who want access to investor wealth are obviously always going to cheer much louder for democratization of capital, and the folks who are looking out for those investors are always going to cheer louder for investor protection. And we're in a democracy, right? That's a healthy tension. But I, in general, am always leery of someone who is absolutist about either of those extremes.

AKIKO FUJITA: Congressman Sean Casten from Illinois, it's great to have you on today, really appreciate the time.

SEAN CASTEN: My pleasure. Thank you.