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William F. Galvin, Massachusetts' top securities regulator, on Wednesday accused Robinhood of violating state law by using overly "aggressive tactics to attract new, often inexperienced, investors" and "gamification to encourage and entice continuous and repetitive use" of its mobile application.
It's the first enforcement action brought under the state's fiduciary rule, in force since September. Robinhood denies the charges.
In an administrative complaint filed in Boston, Galvin also hit the mobile and online trading firm for "failure to implement policies and procedures reasonably designed to prevent and respond to outages and disruptions on its trading platform."
As a result of marketing tactics like using "the promise of free stock to attract new customers," Robinhood's customer base has grown significantly in recent years and those clients are incentivized to "use the platform constantly," according to Galvin.
However, the company failed to keep up with its rapidly expanding client base, experiencing about 70 outages from the beginning of 2020 through the end of November, according to the complaint.
Trading Outages
The trading platform had additional technical problems into December. For example, the platform experienced unspecified technical issues for a second straight day on the morning of Dec. 8, one day after it and Interactive Brokers each had outages.
One of the worst outages lasted for almost two days, March 2-3, and resulted in clients being unable to access their accounts on the day the Dow Jones Industrial Average saw its largest one-day gain to date, according to Galvin's complaint.
Only one week later, Robinhood experienced another outage amid a stock market plunge, the complaint noted. That outage once again angered investors who said they were prevented from trading and capitalizing on the extreme market volatility just before the S&P 500 dropped more than 7% and triggered circuit breakers that temporarily stopped trading, as ThinkAdvisor reported.
