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Illustration: Sarah Grillo/Axios

Robinhood is an unreliable trading platform that takes advantage of the poor, uses sophisticated gamification techniques to get them to spend money, and lies to them about their trades being free, according to a pair of lawsuits filed yesterday and today by the Securities and Exchange Commission and the state of Massachusetts.

Why it matters: Robinhood is the fastest-growing brokerage the world has ever seen, growing to an $11 billion valuation on the back of its ostensibly free trades and the gamification tools it uses to encourage its customers to do more of them.

Driving the news: Robinhood has agreed to pay $65 million to settle SEC charges that it lied about its trades being free. Its duty of "best execution" to its customers forced to offer better prices than the official "NBBO" price if those were available, the SEC says. Instead, Robinhood would settle all trades at NBBO (which stands for national best bid-offer) and pocket the difference.

The state of Massachusetts has sued the discount brokerage; that suit has not been settled, and Robinhood says it will fight it "vigorously".

  • Robinhood is held to a fiduciary standard in Massachusetts: It has a legal duty of care with respect to its customers, which involves checking that their investments are suitable.
  • Instead, per the suit, Robinhood seeks to maximize the number of times that its customers trade. One Massachusetts resident has averaged 92 trades per day on the platform.

Daily push notifications showing the change in value of customers's stocks encourage excess trading.

  • Other push notifications include one saying "Choosing stocks is hard. ๐Ÿ’ช Get started by checking which stock prices are changing the most."

What they're saying: "We are fully transparent in our communications with customers about our current revenue streams, have significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality," a Robinhood spokesperson said in a statement.

By the numbers: Robinhood approved 71,744 Massachusetts residents for options trading. Of those, 14,439 had no investment experience at all.

Our thought bubble: Investing should be boring. If you think it's fun, and free, and if confetti rains down your screen every time you complete a trade, that's a sign you're being manipulated.

Read the SEC complaint here.

Go deeper

Felix Salmon, author ofย Capital
Jan 29, 2021 - Economy & Business

SEC says it will "closely review" restrictions on Reddit-fueled stocks

Photo: Olivier Douliery/AFP via Getty Images

The Securities and Exchange Commission on Friday warned Robinhood and other brokerages that it will "closely review" actions they took on Thursday that prevented investors from buying stock in GameStop and other popular Reddit-fueled stocks.

Why it matters: The move from Robinhood generated anger across the political spectrum and among small investors who wanted to participate in one of the most exciting stock-market trades of the moment.

Robinhood has a stacked policy team โ€” and it's going to need it

Photo Illustration: Justin Sullivan/Getty Images

The stock-trading app Robinhood has an arsenal of political power brokers it can deploy on its behalf as it faces congressional inquiries over its role in an internet-fueled market manipulation frenzy.

Why it matters: The populist, discount trading platform is going to need that firepower because its decision to suspend trading of stock in GameStop and a number of other companies on Thursday has sparked criticism and promised inquiries from both sides of the aisle.

Dion Rabouin, author ofย Markets
Jan 29, 2021 - Economy & Business

Making sense of the GameStop circus

Illustration: Aรฏda Amer/Axios

It's probably fair to say that Thursday was one of the crazier days in the history of financial news.

What happened: Robinhood, which has become synonymous with retail trading and the parabolic rise of stocks like GameStop and Tesla, shut down the ability of its users to buy (but not to sell) some of the platform's most popular names.