Securities regulators in Massachusetts have decided to attack the popular online brokerage Robinhood Financial, the latest in a long pattern of regulators harassing hugely beneficial innovations. Who can forget the early 1980s, when inflation was running at double-digit rates and banks were prohibited from paying interest on checking deposits, but the Securities and Exchange Commission was fighting money market funds?
Robinhood led a movement to virtually eliminate commissions for retail traders, cut racial investing disparities in half and dramatically increase stock ownership among investors under the age of 40 and over 65. Its user-friendly interface and simple, clear, entertaining educational material set a standard that established brokers scrambled to meet.
Two Massachusetts complaints are legitimate but routine. Robinhood had service outages and approved inappropriate accounts for options trading, but all brokerages have these types of issues. And as a fast-growing firm with innovative technology and inexperienced customers, Robinhood has more than most. But these are issues for the SEC, not for state regulators filing cookie-cutter complaints, and suitable for negotiated fines and fixes, not bombshell press releases.
At the other extreme are entirely baffling complaints such as, “Robinhood’s stated mission is to ‘democratize finance for all.’” When did democracy become illegal in Massachusetts? Or, “Robinhood advertisements use young actors and illustrate Robinhood’s attempt to lure young, inexperienced investors into using its platform to make investments.” And then there’s this: “Robinhood provides lists to encourage customers to purchase securities without any consideration of suitability.”
What is the justification for the word “lure”? Yes, Robinhood uses young actors more than most traditional brokers, but also more women and minorities (Did Massachusetts ever object to the ETrade baby?). The firm’s business model is to find and educate people overlooked or ignored by traditional brokers.
All brokers provide lists of stocks and recommendations, and the same lists to all customers. Who would want their broker to redact certain companies from stock lists because it thinks you’re inexperienced? Granted, there is a small point here. Although most of Robinhood’s lists are standards such as the most active stocks, biggest gainers and losers, lowest and highest price-to-earnings growth, or highest dividend rates, the firm used to also list the most popular stocks on its platform before discontinuing the practice. Such a list has dubious investment value and could encourage customers to stampede into the same stocks. But overall, Robinhood’s lists are better than most, with no technical analysis mystic nonsense and no branded proprietary lists.
Two final charges merit thought. The first is that “Robinhood uses gamification strategies in order to lure customers into consistent participation and long-term engagement with its trading platform.” Older readers may remember that early on-line brokers like TD Ameritrade and ETrade were accused of offering “Nintendo trading” for having user-friendly interfaces. Although “gamification” is used throughout the Massachusetts complaint and press release, the only example is confetti raining down on the app when a Robinhood user completes trades. I agree that’s not appropriate, but it hardly supports a general charge of gamification. And again, why the use of the word “lure”? Every company uses strategies to attract and retain customers.
Second, the complaint provides 25 examples of Robinhood customers trading from 15 to 92 times per day, but no other information or context is provided. Someone investing $500 per month in S&P 500 Index stocks could easily execute 25 trades per day on the Robinhood app without drawing concern given there are no commissions, one has the ability to buy fractional shares and that the firm’s minimum trade size of $1. Looked at another way, someone day trading $1 could be gaining valuable investment experience without risking significant cash.
Of course, it’s possible that some inexperienced investors were engaging in risky, high-turnover strategies for significant amounts of money. But that’s why we have rules to identify day traders and impose high capital requirements and other restrictions on them. Plus, day traders are found at all brokerage firms.
Robinhood’s price cutting, user friendliness, high-quality and entertaining educational materials, and appeal to nontraditional investors touched off a massively beneficial revolution in retail trading services. Any scrutiny of its business practices should be careful to curb excesses without impairing the benefits offered to investors, especially young, old, female, minority and others underserved by traditional firms.
Aaron Brown is an American finance practitioner and author on risk management and gambling-related issues.
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