- One Robinhood user in Massachusetts made an eye-popping 12,748 trades since February, according to the state’s complaint, which alleges the popular investing app encouraged inexperienced investors to execute trades frequently.
- The complaint against Robinhood was filed on Wednesday and also detailed how the brokerage firm popular among younger investors failed to supervise the review and approval of options tradings, leading to many inexperienced traders dabbling in more complex investments.
- In an e-mailed statement, Robinhood said, “We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously.”
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Robinhood’s rapid growth and lack of internal controls facilitated an environment where inexperienced investors would trade stocks and options incessantly, nearly 100 times per day on average in one case, the state of Massachusetts said in a complaint filed on Wednesday.
The complaint is separate from a settlement with the Securities and Exchange Commission announced on Thursday that resulted in Robinhood paying $65 million to settle charges of misleading clients on the quality of its trading service.
According to Massachusetts, Robinhood successfully encouraged inexperienced investors to execute trades frequently on its platform by utilizing gamification techniques.
“During the relevant time period, at least 241 Robinhood customers with no investment experience averaged at least 5 trades per day on Robinhood’s platform,” the complaint said.
An average of five trades per day is peanuts relative to 25 Massachusetts Robinhood customers detailed in the complaint.
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According to the regulator’s complaint, since February 1, “customer one” made 12,748 trades with Robinhood, an average of approximately 92 trades per day during that timeframe.
“Customer one had no investment experience prior to trading with Robinhood,” the complaint read.
It then went onto detail 24 more Robinhood customers based in Massachusetts who had no investment experience that traded on average anywhere from 15 to 75 times per day.
Robinhood also failed to supervise the review and approval of options trading in customer accounts, the complaint states.
“Robinhood approved at least 608 Massachusetts customers that did not meet the requisite criteria for options trading,” the complaint said.
Robinhood was also accused of failing to implement policies and procedures designed to prevent and respond to outages in its trading platform, according to the complaint.
“Robinhood experienced as many as seventy outages or disruptions on its trading platform from January 1, 2020 through November 30, 2020 as a result of its failures,” the complaint said. At least seven of those disruptions impacted the ability of Robinhood customers to access their accounts to buy or sell securities.
Four more allegations against Robinhood listed in the complaint include: advertising to younger individuals with little to no investment experience, providing lists to encourage customers to purchase securities without consideration for suitability, employing a number of strategies to encourage customers to continuously engage with its application, and failing to meet the fiduciary duty it owes its customers.
In an e-mailed statement, Robinhood said:
“We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company 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. 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.”
Robinhood is likely hoping for a swift resolution to the complaint as it plans to go public next year at a valuation of more than $20 billion, according to reports.