Massachusetts regulators file manipulation criticism in opposition to Robinhood

Massachusetts regulators filed a complaint against Robinhood on Wednesday accusing the popular trading app of not acting in the best interests of its users.

The complaint cites Robinhood’s “aggressive tactics to attract inexperienced investors, his use of gamification strategies to manipulate customers and his failure to prevent frequent outages and disruptions on his trading platform”.

The complaint marks the first enforcement of the Massachusetts Fiduciary Rule, which Commonwealth Secretary William Galvin began enforcing in September.

“Robinhood, which generates income for trades carried out by its clients, gave customers with no investment experience the ability to do a potentially unlimited number of trades without properly reviewing their options to trade,” a related statement said Complaint reads published statement. According to the regulator, 68% of Massachusetts-based Robinhood clients were approved to trade options after reporting limited or no investment experience.

“Treating this like a game and enticing young and inexperienced customers to do more and more business is not only unethical, but also inconsistent with the standards we require in Massachusetts,” Galvin said in a statement.

“We disagree with the allegations in the Massachusetts Securities Division’s complaint and intend to vigorously defend the company,” a Robinhood spokesman said in a statement to CNBC. “Over the past few months we’ve worked diligently to ensure that our systems scale and are available when employees need them. We’ve also made significant improvements to our options, adding safeguards and improved training materials.”

The Massachusetts complaint, first reported by the Wall Street Journal, follows a reported investigation by the Securities and Exchange Commission in September.

Robinhood has pioneered the commission-free trading model since its inception in 2013, exploding its user base amid the Covid pandemic. The company had a record 3 million new customers in the first four months of the year as stocks slipped into a bear market. The app has drawn a lot of attention from Wall Street, and stock volatility in popular names like Tesla has since been attributed to these new investors in the market.

Robinhood said it had 4.3 million daily average earnings in June, outperforming any publicly traded established broker. Robinhood ‘said its DARTs more than doubled in the second quarter from the last three months.

This year’s success has also brought growing pain. Robinhood has seen multiple outages, including a multi-day outage in March, leaving some clients unable to trade for the markets on a historic day.

In August, the company announced a $ 200 million Series G funding round and raised its valuation to $ 11.2 billion. Robinhood, slated to go public in 2021, has hired Goldman Sachs to lead preparations for the IPO, according to Reuters.

– CNBC’s Kate Rooney contributed to the coverage.

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