Robinhood fined $7.5 million over trading practices

No-fee trading app Robinhood has agreed to pay a $7.5 million fine and revamp its operational practices in a settlement with Massachusetts’ securities regulators.

The agreement addresses allegations that Robinhood encouraged inexperienced investors to engage in risky trades.

This agreement resolves an administrative enforcement action initiated in 2020 by Massachusetts Secretary of State Bill Galvin. The action was based on claims that Robinhood’s platform design and marketing strategies amounted to a “gamification” of trading. This approach, according to the allegations, boosted user engagement but did so at the risk of promoting hazardous trading behaviors among inexperienced investors.

According to the enforcement arm of the Massachusetts Securities Division, the app-based platform failed in its duty to stop frequent outages and disruptions on its trading platform. This was in addition to employing aggressive marketing tactics to draw inexperienced traders, including the use of “gamification methods to control clients.”

According to its own calculations, 68% of Massachusetts-based Robinhood customers had been authorised to trade options even after reporting limited or no investing expertise.

In December 2020, the Secretary of the Commonwealth of Massachusetts, William Galvin, filed a lawsuit against Robinhood, accusing the popular online trading platform of aggressively marketing to inexperienced investors and exposing them to unnecessary risks. The lawsuit also alleged that Robinhood had failed to adequately screen its customers for eligibility to trade options.

Robinhood has faced a number of legal challenges in recent years. The company has been accused of misleading customers about its business practices and exposing them to unnecessary risks, and has faced a number of regulatory investigations as a result. As a result, the company has pledged to work with regulators to address concerns about its business practices, and has made a number of changes to its platform in recent months in response to regulatory pressure.

Earlier in April 2022, the North American Securities Administrators Association (NASAA) has issued a $10.2 million penalty against Robinhood over poor communications with its customers and trading outages on its platform in 2020.