Robinhood gets 'you addicted' so you 'keep spending money,' lawmaker warns

·4 min read

Robinhood’s (HOOD) stock began trading on Thursday at $38 a share, equating to a valuation of around $32 billion by market cap. Shares did not surpass their initial $38 price on Thursday, trading at around $36. 

Though Robinhood’s IPO marks a celebratory occasion for the company and investors, U.S. Congressman Sean Casten (D-IL), urges users and prospective investors to tread carefully.

“[Robinhood] is a business that, at [its] core, has no economic interest in creating value for investors,” Casten told Yahoo Finance Live on Thursday. “It makes money by getting you to come to their site, by using the tricks that Facebook (FB) and YouTube (GOOG, GOOGL) and these other social media companies use to get you addicted and keep spending money, and then makes money on the backside as a proportion of how much money the market makers make on the back end.”

Robinhood declined to respond to Casten’s suggestion that the platform may be addictive.

Casten joined Yahoo Finance Live to discuss the “Trading isn’t a Game Act” and the future of trading platforms as Robinhood makes its public debut. 

The act, introduced by Casten along with Congressman Bill Foster (D-IL), would require the U.S. Government Accountability Office (GAO) to “carry out a study on the impact of the gamification of online trading platforms,” including how gamification is used in marketing strategies and incorporated within these trading applications, according to a press release.

Robinhood Markets, Inc. co-founder Baiju Bhatt and CEO and co-founder Vlad Tenev walk on Wall Street after the company&#39;s IPO in New York City, U.S., July 29, 2021.  REUTERS/Andrew Kelly
Robinhood Markets, Inc. co-founder Baiju Bhatt and CEO and co-founder Vlad Tenev walk on Wall Street after the company's IPO in New York City, U.S., July 29, 2021. REUTERS/Andrew Kelly

“[Robinhood has] an economic incentive to bring in money that is as uninformed as possible and sell it to people who are sophisticated as possible and, with respect for the CFO [Jason Warnick] who's going to become very wealthy today, that's not a model that other broker-dealers are emulating because other broker-dealers have recognized there are such massive conflicts of interest there,” Casten added.

A controversial business model

Robinhood, which serves a user base of over 18 million as of the end of March, famously stated that it aims to “democratize finance for all” — a slogan the company repeated at its recent IPO roadshow. Buzz surrounding the trading platform’s IPO has also called into question how the company generates revenue.

Robinhood makes money through payment for order flow (PFOF), which means that Robinhood is compensated for routing stock or other trade orders from its clients to third-party firms, which then actually execute the trade. It is these third-party companies that pay Robinhood for routing orders to them. Trading platforms like Webull and E*TRADE also earn revenue through PFOF.

“There's a value, I think, for payment for order flow, particularly for small, very liquid commodities, but there's a tension for a company that has an obligation to look out for the best interests of its investors if your only money is coming from payment for order flow,” Casten said.

Casten referenced the story of Alex Kearns, a 20-year-old Robinhood user who died by suicide last year when he was notified by the company that his account had a negative balance of around $730,000. Kearns’ family is now suing Robinhood, alleging that the company’s targeting of inexperienced investors and “aggressive tactics” led to his death. The complaint states that Kearns did not actually owe the money because his losses would have been covered by options held in his account.

“When you spend as much time with a family who is grappling with the fact that they lost their son because their son got too addicted to this platform, and now [Robinhood] is saying that [they are] a safety first company. It's a bit disingenuous, to put it bluntly,” Casten said.

After the death of Kearns, Robinhood issued a statement saying that it had made improvements to its customer service, including providing live phone support for customers with an open option position.

"We were devastated by Alex Kearns' death," Robinhood said in a statement cited by CNN. "We remain committed to making Robinhood a place to learn and invest responsibly."

