Has Robinhood been gamifying the market and gaming its customers?

Darren Sinden

The question being asked now is whether brokers such as Robinhood are acting in their clients best interest in entering into such arrangements. After all the buyers of the order flow are not acting in an altruistic fashion

Robinhood has enjoyed significant growth in both clients numbers and trading activity during 2020 as millennials with time on their hands rushed to trade stocks and equity options on the platform.

Traders using Robinhood pursued unconventional strategies that saw bankrupt companies such as Hertz effectively rise from the dead. Whilst Kodak shares saw multi-digit gains as millennials pilled into the stock on the award of a dubious-looking government contract.

This kind of trading drew accusations that Robinhood traders and those using its platforms did not understand how the markets worked or the risk that they were taking when trading in so-called zombie stocks. Yet so influential where Robinhood’s traders en masse that hedge funds started to analyse the holdings and activity of Robinhood’s client base. Data which Robinhood made freely available in aggregate on a daily basis.

However, it is not the trading tactics of Robinhood clients that has led the state to take legal action against the broker.

Rather it is what the lawsuit describes as “aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent frequent outages and disruptions on its trading platform.”

Accusations that Robinhood has roundly rejected.

However, Massachusetts is not alone in calling Robinhood to account for its actions. The US securities regulator the SEC has today charged Robinhood with misleading customers about revenue sources and failing to satisfy the duty of best execution.

Those charges relate to the controversial practice of payment for order-flow under which a broker receives remuneration from a market maker or hedge fund for routing its orders through them, rather than directly onto an exchange. Those payments help to subsidise the broker’s cost and allow them to offer commission-free trading.

The question being asked now is whether brokers such as Robinhood are acting in their clients best interest in entering into such arrangements? After all the buyers of the order flow are not acting in an altruistic fashion and are prepared to pay for that flow because they believe they can make money out of it. Whether through individual orders or through the aggregated business as a whole.

The potential for conflicts of interest in these arrangements leaves a bad taste in the mouth and is reminiscent of the debate around how B-bookers in the leveraged FX market treat and view their clients. That is as a continuous stream of inexperienced traders who they can take advantage of and oppose through the execution of their trades.

Indeed the debates about the transparency of execution, order-routing, choice of counterparty and attainment of best execution that are so familiar to, and ongoing in, the London FX market are all applicable to the practice of payment for order flow. Which has proved so popular in the fragmented world of US equity trading and execution.

The potential for conflicts of interest and perceived lack of disclosure were at the heart of comments made by senior SEC members about the actions that the commission has taken against Robinhood.

”Stephanie Avakian, Director of the SEC’s Enforcement Division. Commented that: “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm, adding that “Brokerage firms cannot mislead customers about order execution quality.”

Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit said: Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars,” and that “Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers.”

In popular folklore, Robin Hood was able to get away from the Sheriff of Nottingham today’s namesake is unlikely to be so lucky.

Read this next

Retail FX

Weekly Roundup: Funded Trader closure, Coinbase adds Apple Pay

Welcome to this week’s roundup, where we delve into the latest developments in the Forex, Fintech, and cryptocurrency markets. Stay ahead of the curve with our comprehensive overview of the week’s most impactful events and trends across these dynamic sectors.

blockdag

Presale Rush: BlockDAG Outshines Furrever Token and DeeStream Presales with 20,000x ROI Potential, Raising Over $16.4M

Discover April 2024’s presale hits, as BlockDAG, Furrever Token, and DeeStream Presales battle it out. Which will explode in 2024?

Digital Assets

Shakeeb Ahmed gets three-year sentence for hacking Nirvana, Crema

A New York court has sentenced computer security engineer Shakeeb Ahmed to three years in prison for conducting flash loan attacks on decentralized cryptocurrency exchanges in 2022, marking the first-ever conviction for a breach involving smart contracts.

Digital Assets

TON Foundation teams up with HashKey on fiat access for Telegram Wallet

The TON Foundation, a collective of developers behind The Open Network (TON) blockchain, has entered into a strategic partnership with digital asset financial services firm HashKey Group.

blockdag

BlockDAG aka Kaspa’s Toughest Competitor Releases DAGpaper, Lightes Up The Las Vegas Sphere Pulling Shiba Inu Investors & Amassing $16.4M in Presale

BlockDAG, emerging as a Kaspa competitor, unveils its DAGpaper, spotlighting the Las Vegas Sphere and captivating Shiba Inu investors with a $16.4M presale success.

Fundamental Analysis

Global FX Market Summary: USD, ECB, Gold, Oil  April 12 ,2024

A strong US economy, cautious Fed policy compared to Europe, and safe-haven demand are all fueling the surge of the US Dollar.

Digital Assets

Thai crypto exchange Bitkub eyes $3 billion valuation

Thailand’s largest cryptocurrency exchange Bitkub is gearing up for a public offering next year with a potential valuation of up to $3 billion, according to Bitkub Capital Group CEO Jirayut Srupsrisopa.

Technical Analysis

GBPUSD Technical Analysis Report 12 April, 2024

GBPUSD currency pair can be expected to all further toward the next support level 1.2400, target price for the completion of the active minor impulse wave.

Market News

Navigating Currency Trends: Extensive Analysis on EUR/USD Signal

Traders Union provides comprehensive daily analysis and signals for EUR/USD.

<