Massachusetts Accuses Robinhood of Gamification

The State of Massachusetts is the latest authority to target Robinhood, contending that the trading platform has aggressively marketed itself to investors without regard for the best interests of its customers. 

In a recently filed 24-page administrative complaint, Massachusetts alleged that Robinhood used aggressive marketing and advertising tactics to attract new, often inexperienced customers, while failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base. Specifically, the state said that Robinhood used tactics like gamification to encourage and entice customers to repeatedly and continuously use its trading application.

Massachusetts adopted rules earlier this year that require broker-dealers to meet a fiduciary level of care with their customers. As of Dec. 8, Massachusetts had more than 486,000 Robinhood customer accounts with a total value of about $1.6 billion, according to the state. About 68% of Massachusetts customers approved for options trading of Robinhood’s platform identified as having limited or no investment experience, the complaint said. The median age for Robinhood’s customers is 31. 

The complaint noted that Robinhood experienced as many as 70 outages or disruptions on its trading platform between January and November of this year, including on March 2 when its system collapsed and kept investors from benefiting from historic market gains.

“Robinhood knew or should have known well before March 2020 that the infrastructure of its trading platform was incapable of supporting its rapidly growing customer base,” the complaint said. “However, Robinhood was plagued by outages or disruptions every month throughout the remainder of the year.”

Robinhood disagrees with the allegations and intends to defend itself, a spokesperson said in a statement. “Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them,” the spokesperson said. “We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials.”

Massachusetts wants Robinhood to provide restitution to fairly compensate for customer losses and disgorge all profits and other direct or indirect remuneration received from the wrongdoing.

The complaint marks the latest round of scrutiny that Robinhood has received as its popularity grows. The number of investors using Robinhood has jumped to 13 million in May 2020 after COVID-19 hit the U.S., prompting retail investors to fuel a buying boom in the markets this year.

Earlier this month, Robinhood agreed to pay $65 million after the Securities and Exchange Commission (SEC) charged the online brokerage for failing to disclose to customers that it received payments from trading firms for routing customer orders to them.