Massachusetts regulators are submitting a criticism towards Robinhood for manipulating clients
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 regulatory complaint cited 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 for options trading 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.
The message was first reported by The Wall Street Journal.
"We haven't seen the complaint, but we have and will continue to work closely and cooperatively with all of our regulators," a Robinhood spokesman said in a statement to CNBC on Wednesday morning. "Robinhood has opened the financial markets to a new generation of people who were previously excluded. We are committed to operating with integrity, transparency and in compliance with all applicable laws and regulations."
The Massachusetts complaint 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, and its user base has exploded amid the pandemic. In the first four months of the year alone, the company had a record three million new customers 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 saw 4.3 million average daily revenue trades [DARTs] per day in June, outperforming all publicly traded established brokers. Robinhood's DARTs more than doubled in the second quarter from the three months before, according to the company.
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 is expected to go public in 2021 and has hired Goldman Sachs to lead its IPO preparations, Reuters said, citing sources.
– CNBC's Kate Rooney contributed to the coverage.
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