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Galvin’s office says popular investing app Robinhood violates state securities rules

A complaint alleges that the online brokerage values trade volume over what’s best for customers. The company disputes the allegations.

Gabby Jones/Bloomberg

Massachusetts regulators on Wednesday accused the popular online investing platform Robinhood of violating state securities laws, claiming in an administrative complaint that the app-based service treats personal finance as a game to attract young and inexperienced consumers.

The complaint, filed by the office of Secretary of State William Galvin, also says the Silicon Valley company has failed to shore up its digital infrastructure amid its runaway growth, resulting in several outages that limited customers’ ability to trade during periods of major stock market volatility.

“Their entire business plan is about building volume for their site and not helping people intelligently invest,” Galvin said in an interview. “They have to make sure that their customers understand that there’s a risk of loss. It’s not a game. It’s real money, and they could lose it.”


Users sign up to the online brokerage for free and make trades in stocks and other investments without paying a commission fee. The seven-year-old company then sells those trades to a third-party entity, earning a small amount of money on each transaction.

Galvin’s office wants Robinhood Financial LLC to hire an outside consultant to examine its marketing policies and procedures and to pay more attention to protecting its infrastructure from outages. The complaint also seeks administrative fines.

In a statement, Robinhood said it disputes the allegations and will defend itself “vigorously.”

“Millions of people have made their first investments through Robinhood, and we remain continuously focused on serving them,” the company said. According to the complaint from Galvin’s office, Robinhood has nearly 500,000 accounts in Massachusetts, with a value of about $1.6 billion.

Robinhood is not alone in making it simpler for people to carry out stock trades with the push of a digital button. It has several upstart competitors, and many of the legacy brokerage firms have also rolled out flashy digital offerings.


But the rapid growth of Robinhood has placed it at the center of a debate over whether technology can make it too easy to execute transactions that can have life-altering financial consequences. The company has adapted many successful tech design elements, including push notifications and visually pleasing flourishes such as its signature burst of confetti at the completion of a trade.

Robinhood surpassed 13 million users this year as amateur investors looked to cash in on the financial turmoil surrounding the COVID-19 pandemic, with 3 million signing up in the first four months of 2020 alone.

The company has also faced an inquiry from federal regulators over how it handled outages in March during some of the most turbulent days in stock market history. And the Financial Industry Regulatory Authority fined the company $1.25 million last December over its method of routing customer orders.

Abu Jalal, professor of finance at Suffolk University, said he believes the issues around outages are ones that the company and others like it will have to solve as they continue to grow. But he’s less concerned that increasing the ease and enjoyment of trading will be a long-term problem.

“Ultimately, the way to avoid this is to have more investor education,” he said. “Putting restrictions on different platforms, I don’t know how successful that’s going to be, because people will always find a way to get around those restrictions.”

Galvin said some Robinhood practices run afoul of state rules. The complaint alleges that the company does not follow its own measures designed to prevent inexperienced investors from participating in options trading, which can bring both higher rewards and bigger losses.


The complaint filed against Robinhood by Galvin’s securities division is the first action under new state rules holding brokers to a fiduciary standard.

In addition, Galvin’s office claims that Robinhood’s practice of presenting customers with a list of most frequently traded stocks amounts to giving them recommendations.

“This is no different from a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to that customer,” the complaint said.

Robinhood disagreed with that characterization.

“Robinhood is a self-directed broker-dealer and we do not make investment recommendations,” the company said in its statement, adding that it is working to improve its systems to prevent outages, and to increase consumer education.

The company will have an opportunity to respond to the securities complaint, and then the two sides could either work out an agreement or appear before a state administrative hearing officer whose decision could later be appealed in court.

While Galvin’s office has raised concerns about the volume of trades being carried out by inexperienced investors — the complaint noted that one person with no experience made 12,700 trades in just over six months — some users say the low barrier to trading is a plus.


Tim Cappalli of Boston said he’s turned an investment of about $3,800 into $6,500 over five years on Robinhood. He credits some good tech stock buys with offsetting a handful of other trades that were disappointing, but he said he’s gained valuable knowledge about investing by using the app.

But even from the start, Cappalli said, he knew not to invest money that he could not afford to lose. He hopes other Robinhood customers take the same approach.

“Anything that is a high-stakes action, that is super easy to do, is always problematic,” he said. “I would compare it to a casino, where it’s super easy to blow your money in minutes. I would say that Robinhood is the closest thing to a casino for someone who’s not familiar with investing.”

John Ellement of the Globe staff contributed to this report. Material from Bloomberg News was also used.

Andy Rosen can be reached at Follow him on Twitter @andyrosen.