Even before GameStop stock frenzy, Robinhood raised a lot of red flags

Experts worry that inexperienced traders could get hurt by the gamification tactics used by Robinhood to encourage more trades.

Richard Nieva Former senior reporter
Richard Nieva was a senior reporter for CNET News, focusing on Google and Yahoo. He previously worked for PandoDaily and Fortune Magazine, and his writing has appeared in The New York Times, on CNNMoney.com and on CJR.org.
Richard Nieva
4 min read

Robinhood has long been criticized for allegedly turning investing into a game. 

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Robinhood, the stock trading app at the center of the bizarre GameStop saga, has long been controversial. Even before the run-up of GameStop and other stocks like AMC and BlackBerry elevated the fee-free service to a household name, Robinhood had been accused of downplaying the risks of stock trading, essentially presenting complex financial instruments like a game in its effort to draw in young people and new investors. 

That strategy has had tragic outcomes. In June 2020, a college student named Alexander Kearns killed himself after seeing a negative balance of more than $700,000 in his Robinhood account, though some of his trades were incomplete. In a suicide note, Kearns named Robinhood, asking how it allowed him to take on so much risk.

"How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?" the note read. "There was no intention to take this much risk."

It's easy to see how novice traders like Kearns get sucked into Robinhood, which uses Silicon Valley growth-hack tactics to command user attention. The service encourages transactions by showering digital confetti when trades are made. New members are given a free stock when they sign up. Pair the dopamine rush of a game with the herd mentality of social media -- a Reddit forum called r/WallStreetBets has served as the virtual water cooler for whipping up recent activity -- and it becomes apparent how a swarm of traders could push shares of an ailing video game retailer more than 800% higher than they were two weeks earlier.

Coye Cheshire, a professor at the UC Berkeley School of Information, says no one knows how the situation on the stock market -- which has now swept up shares of AMC, Koss and others -- will play out. But if major hedge funds, which were the target of the r/WallStreetBets mob, can get wiped out, so can a lot of regular people.

"The app makes [trading] seem fun and easy, but the market is really complicated," Cheshire said. "That can be dangerous."

Watch this: AOC looks into Robinhood's business practices

Robinhood, which didn't respond to a request for comment for this story, was founded in 2013 by former Stanford University roommates Baiju Bhatt and Vladmir Tenev. The app was a pioneer in commission-free online trading with a stated mission to "democratize finance." The product was tailored to serve that ethos and appeal to people with little experience in the stock market. 

Using the app, traders can swipe to confirm share purchases, get notifications and read market news. In one tutorial on YouTube, a vlogger describes the app as "like Tinder, but for things that make you money." In May, the company said it has more than 13 million accounts.

Amid the recent stock market chaos, Robinhood last week disabled trading for GameStop, AMC and other companies targeted by the Reddit crowd. Lawmakers on both sides of the aisle, including Democratic Rep. Alexandria Ocasio-Cortez and Republican Sen. Ted Cruz, slammed the decision as unfair to little investors. The company later said it was a "risk-management decision."

Sen. Elizabeth Warren, a fierce critic of Wall Street, alluded to the danger of Robinhood's gamification during an interview on CNBC the same day. She slammed "outfits like Robinhood that say, 'We're going to give you prizes to come join with us.'" Warren also criticized the app for requiring users to sign arbitration agreements that prevent problems from being publicly disclosed. "That doesn't create a healthy market," she said.

Robinhood has already taken heat from lawmakers and regulators over the last few months. Rep. Sean Casten, who represents Kearns' district, told the chairman of the Securities and Exchange Commission that the app's documentation didn't do enough to explain the risks involved in trading. Robinhood later paid $65 million to settle with the SEC for failing to adequately disclose its revenue sources.

In December, securities regulators in Massachusetts sued Robinhood Robinhood, saying its gamelike features "encourage and entice continuous and repetitive use of its trading application." 

"Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical," Secretary of the Commonwealth William Galvin said at the time, "but also falls far short of the standards we require in Massachusetts." 

The pandemic has only helped Robinhood's popularity. People have sheltered at home with little to do. Many have lost their jobs. Having fun on an app with the promise of making money is a potent lure. 

Downloads of the app have soared alongside GameStop's stock. It was the No. 1 free app on both Apple's and Google's app stores last week. If Robinhood is a game, more people are coming to play.