Robinhood, the stock buying and selling app at the heart of the weird GameStop saga, has lengthy been controversial. Even earlier than the fee-free service was not too long ago elevated to headlines, Robinhood had been accused of downplaying the dangers of stock buying and selling, primarily presenting complicated monetary devices like a recreation in its effort to attract in younger folks and new traders.
That technique has had tragic outcomes. In June 2020, a school scholar named Alexander Kearns killed himself after seeing a adverse stability of greater than $700,000 in his Robinhood account, although a few of his trades have been incomplete. In a suicide notice, Kearns named Robinhood, asking the way it allowed him to tackle a lot threat.
“How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” the notice learn. “There was no intention to take this much risk.”
It’s straightforward to see how novice merchants like Kearns get sucked into Robinhood, which makes use of Silicon Valley growth-hack techniques to command consumer consideration. The service encourages transactions by showering digital confetti when trades are made. New members are given a free stock once they enroll. Pair the dopamine rush of a recreation with the herd mentality of social media — a Reddit discussion board known as r/WallStreetBets has served as the digital water cooler for whipping up current exercise — and it turns into obvious how a swarm of merchants may push shares of an ailing online game retailer greater than 800% greater than they have been two weeks in the past.
Coye Cheshire, a professor at the UC Berkeley School of Information, says nobody is aware of how the state of affairs on the stock market — which has now swept up shares of AMC, Koss and others — will play out. But if main hedge funds, which have been the goal of the r/WallStreetBets mob, can get worn out, so can plenty of common folks.
“The app makes [trading] seem fun and easy, but the market is really complicated,” Cheshire stated. “That can be dangerous.”
Robinhood, which didn’t reply to a request for remark for this story, was based in 2013 by former Stanford University roommates Baiju Bhatt and Vladmir Tenev. The app was a pioneer in commission-free on-line buying and selling with a acknowledged mission to “democratize finance.” The product was particularly tailor-made to serve that ethos and attraction to folks with little expertise in the stock market.
Using the app, merchants can swipe to verify share purchases, get notifications and browse market information. In one tutorial on YouTube, a vlogger describes the app as “like Tinder, but for things that make you money.” In May, the firm stated it has greater than 13 million accounts.
Amid the current stock market chaos, Robinhood on Thursday disabled buying and selling for GameStop, AMC and different corporations focused by the Reddit crowd. Lawmakers on either side of the aisle, together with Democratic Rep. Alexandria Ocasio-Cortez and Republican Sen. Ted Cruz, slammed the resolution as unfair to little traders. The firm later stated it was a “risk-management decision.”
Sen. Elizabeth Warren, a fierce critic of Wall Street, alluded to the hazard of Robinhood’s gamification throughout an interview on CNBC the similar day. She slammed “outfits like Robinhood that say, ‘We’re going to give you prizes to come join with us.'” Warren additionally criticized the app for requiring customers to signal arbitration agreements that stop issues from being publicly disclosed. “That doesn’t create a healthy market,” she stated.
Robinhood has already taken warmth from lawmakers and regulators over the previous couple of months. Rep. Sean Casten, who represents Kearns’ district, informed the chairman of the Securities and Exchange Commission that the app’s documentation didn’t do sufficient to clarify the dangers concerned in buying and selling. Robinhood later paid $65 million to settle with the SEC for failing to adequately disclose its income sources.
Last month, securities regulators in Massachusetts sued Robinhood, saying its gamelike options “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 stated at the time, “but also falls far short of the standards we require in Massachusetts.”
The pandemic has solely helped Robinhood’s recognition. People have sheltered at dwelling with little to do. Many have misplaced their jobs. Having enjoyable on an app with the promise of getting cash is a potent lure.
Downloads of the app have soared alongside GameStop’s stock. It was the No. 1 free app on each Apple’s and Google’s app shops final week. If Robinhood is a recreation, extra individuals are coming to play.