Robinhood used strategies "such as gamification to encourage and entice continuous and repetitive use of its trading application," said the enforcement arm of the Massachusetts Securities Division.
Citing Robinhood’s exponential growth since its founding in 2013, the complaint said the company employed advertising and marketing techniques meant to target younger, inexperienced investors "with little, if any, investment experience." It gave these investors the ability to make a potentially unlimited number of trades without properly screening them to be approved for options trading. The complaint said the median age of Robinhood’s customer is 31, and about 68% of Massachusetts customers approved for options trading on Robinhood report having limited or no investment experience.
The complaint said that between 2016 and 2018 Robinhood grew its customer base from about one million to about six million, a 500% increase. Between the end of May 2019 and May 2020, the company grew its customer accounts by 30%, from about 10 million to about 13 million.
As of December 8, Robinhood had 486,598 Massachusetts customer accounts totaling more than $1.6 billion, the complaint said.
Massachusetts officials also said that Robinhood failed to take adequate steps to set up internal controls to protect customers and its platform during its rapid expansion. It noted that from January through November, the company experienced about 70 outages. One of the most notable occurred on March 2 and lasted almost two days, which meant customers were unable to access their accounts on the day the Dow Jones Industrial Average saw its largest one-day gain to date, the complaint said.
Only one week later, Robinhood experienced another outage amid a stock market plunge.
“Robinhood should have known well before March 2020 that the infrastructure of its trading platform was incapable of supporting the rapid expanding customer base,” the complaint said. It noted that the company faced disruptions every month throughout the remainder of the year—six in April, 15 in June and seven in August. Robinhood even admitted that its trading platform disruptions partly stemmed from the lack of a sufficient infrastructure, the complaint said.
The company, however, continues to invite more and more customers to open accounts, and encourages them to use the platform constantly, the complaint said.
“Once individuals become customers, Robinhood relentlessly bombards them with a number of strategies designed to encourage and incentivize continued and repeated engagement with its application,” the complaint said.
The state's Securities Division is seeking an administrative fine and an order requiring Robinhood to engage an independent compliance consultant to review its platform and infrastructure, as well as its policies and procedures.
Robinhood officials could not be reached for comment.