Robinhood stock trading app faces allegations of ‘predatory’ marketing practices

Photo (c) Guido Mieth - Getty Images

Massachusetts securities regulators claim the platform is only interested in growing its user base

Stock-trading app Robinhood, which has more than 13 million subscribers, is reportedly set to face a complaint from Massachusetts securities regulators regarding its marketing practices. 

According to a draft of the complaint seen by The Wall Street Journal, regulators plan to accuse the company of aggressively marketing its services to inexperienced investors and exposing investors to "unnecessary trading risks.” The complaint also mentions the platform’s failure to prevent frequent outages. 

“The worst aspect of what they do clearly is they way they are gamifying the idea of investing,” Massachusetts Secretary of the Commonwealth William Galvin told CNBC. “This is a very reckless company when it comes to these investors. They’re interested in expanding their market base, they’re not interested in serving their investors.” 

Robinhood said it disagrees with the allegations in the complaint and intends to defend itself “vigorously.”  

“Robinhood is a self-directed broker-dealer and we do not make investment recommendations. Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them,” the company said in a statement. “We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials. Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them.”

Outages and scrutiny

Earlier this year, subscribers were unable to access their Robinhood accounts during several exceptionally volatile trading days. The outage followed another system failure a week earlier -- one that unfortunately occured when the market delivered its best-ever single day performance. 

Following the outages, the company’s founders said its infrastructure was struggling to handle the influx of users. It promised at the time that it was making changes to prevent future outages.

“Our team is continuing to work to improve the resilience of our infrastructure to meet the heightened load we have been experiencing,” the founders said at the time. “We’re simultaneously working to reduce the interdependencies in our overall infrastructure. We’re also investing in additional redundancies in our infrastructure.”

Robinhood has also been accused by the U.S. Securities and Exchange Commision (SEC) of failing to fully disclose deals with high-speed traders. Last year, the platform paid $1.25 million to settle claims from the Financial Industry Regulatory Authority for pricing violations.

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