The stock trading frenzy of January 2021 brought a relatively new player in the securities markets into public consciousness—the platforms offering no- or low-commission trading that seek to appeal to young and less-experienced investors with a “fun” if not “delightful” user experience. Most prominent among these new brokers is Robinhood, with a slick mobile phone app, which claims that its platform will “democratize finance” by making investing cheaper and easier for the masses who have been looked down upon and locked out by the wealthy elites of Wall Street.
However, Robinhood’s claims of “democratization” have all the hallmarks of manipulation and exploitation, making Robinhood’s founders multibillionaires while many of its retail customers suffer financial ruin. That is because platforms like Robinhood take arguably legal kickbacks for routing their customer orders—known as payment for order flow—to high frequency trading firms which execute those orders, almost always in dark, off-exchange venues. To maximize those kickbacks, Robinhood’s mobile trading app is gamified via predatory digital engagement practices to disarm its customers’ financial self-defense mechanisms and prompt as much frequent and risky trading as possible. Such trading behavior has been shown to be highly detrimental to retail investors, and indeed many of Robinhood’s customers have been harmed by engaging in such practices, some grievously. The result is that, unlike the legend of Robin Hood stealing from the rich and giving to the poor, the Robinhoods of the world are taking from the less experienced and enriching themselves and their fellow Wall Street billionaires.
But it does not have to be this way. Finance can be genuinely democratized (easier access, lower costs, user-friendly financial tools, etc.) and trading can be demystified in ways that facilitate wealth creation rather than wealth extraction. However, for that to happen, regulators must enforce existing laws and rules against illegal conduct and impose meaningful penalties on individual corporate officers that punish and deter. Regulators must also enact new rules to prohibit, for example, predatory digital engagement practices. Once the highly profitable lawbreakers and predators are shut down, the financial industry can focus on serving Main Street investors rather than exploiting them to enrich Wall Street.
Dennis M. Kelleher, Jason Grimes, and Andres Chovil, SECURITIES—DEMOCRATIZING EQUITY MARKETS WITH AND WITHOUT EXPLOITATION: ROBINHOOD, GAMESTOP, HEDGE FUNDS, GAMIFICATION, HIGH FREQUENCY TRADING, AND MORE, 44 W. New Eng. L. Rev. 51 (2022), https://digitalcommons.law.wne.edu/lawreview/vol44/iss1/4