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Robberhood and the Gamification of Investing

Fintech is a quickly developing field. There’s new apps every day, and almost every month there is a new unicorn in this realm as well. One of those unicorns is Robinhood, an investment platform which hosts both a site and an app, the latter being the most popular of the two. I will be very honest. When I first heard of this app I was quite excited. Despite having no real intentions of using it myself, the idea of making investing accessible for all, or at least a lot more people, is a great idea. It opens up the stock market to those who do not have tens of thousands to invest. It removes some of the elitism from this segment of financial decision-making. However, the app is riddled with other problems I want to dive into in this article.


The Business Model The idea that everyone can get started in investing is great. I think everyone should. One way Robinhood, amongst other platforms, makes sure it’s accessible to all and everyone is its main marketing ploy: free trading. Or, rather it does not charge commissions on your trading. This does making trading a lot cheaper, and means that those who are investing with smaller sums of money do not see their returns fully eaten by commissions. However, commissions is where most trading platforms make their money. Given that Robinhood does not charge those, its main source of income needs to come from somewhere else. I always use this rule of thumb: “if the service is free, you are the product.” And unsurprisingly, this also holds true for Robinhood. How does this work? Well Robinhood makes most of their money on selling your data. This is not very surprising. Most apps that offer a service either have ads, membership subscriptions or sell your data to make a profit. Some apps even do a combination of these. Let’s look at this for Robinhood. Robinhood offers a Gold membership which gives the client access to margin loans and investing tools, interest on uninvested cash, lending stocks purchased on margin, and fees on purchases using the company's debit card. That is one source of income. However, the main source of income for Robinhood is a rather controversial one (controversial according to Investopedia at least), and that is payment for order flow: "a common although controversial practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution." Fun fact: payment for order flow is a practice pioneered by Bernard Madoff. Yes, the dude from the biggest Ponzi scheme ever. Red flags anyone? Here’s the joke: the definitions of Investopedia and Robinhood are miles apart on what’s actually going on here. Investopedia’s definition is the one you just read, and it's pretty straight forward. How does Robinhood define this practice and its revenue? Robinhood refers to this revenue as "rebates from market makers and trading venues." That’s slightly different.


For those who aren’t 100% in the know with this jargon (I had to look it up as well), what’s essentially going on here is that Robinhood sells your data to firms who’ve got skin in the game. They know what stocks you want to buy, and which ones you want to sell, but before you do that, they move that information to high-speed trading firms for directing customers' buy and sell orders to them. This means that those firms can anticipate the market, and they can do it accurately, because the information they work with is an order you have already placed. Your order is moving slower than these high-speed traders, so they get the benefit, and you don’t. To paint you the picture: this practice means smaller traders do not get the best price, but this yielded Robinhood approximately $180 million in just the second quarter of 2020. Stealing from the rich and giving to the poor? My ass. The legend is perpetually turning in his grave since this nonsense started.


Don’t think I’m revealing some massive truth bomb here either. Robinhood has been sued for these (mal)practices already. On December 17, 2020, it was reported that Robinhood had agreed to pay $65 million to settle a civil fraud investigation launched by the Securities and Exchange Commission (SEC) over the company's early failure to fully disclose its practice of payment for order flow. Be careful in reading that sentence. They are not being sued because of what they’re doing, what they’re doing is legal (yes it actually is). Not disclosing it is what they got sued for. Yippie. In addition to this lawsuit they have also already been fined for aggressive marketing to inexperienced investors, and have been in the news for bribery (only offering refunds in the form of vouchers for mistakes that were most definitely theirs, conditional on the investors not taking legal action), fined for a failure to perform systematic best execution reviews, and failures of compliance. A full list can be found here. And in addition to these questionable practices let’s not forget Robinhood’s involvement with the short squeeze of GameStop. Robinhood was actually the primary platform of the investors involved with the short squeezes, and yet it still raised margin requirements and froze the ability to purchase additional shares in the squeezed stocks in order to tamp down on market volatility. This sparked substantial public outcry as several of the heavily-traded stocks fell. Robinhood lifted trading restrictions by the week's end. When the damage had already been done. I’m not sure you really need me saying this, but this is not a nice company…


Gamification of Investing In addition to its rotten business model, the questionable practices and the generally misleading name, there is another aspect, focusing more on a behavioural scientific viewpoint, that I would like to discuss. Now it needs to be mentioned that Robinhood isn’t the only app/platform doing this, but I have a feeling it might be the most popular one doing so. What am I talking about? The gamification of investing. Investing is not a game. You can actually lose a lot of money by not doing it properly. This is a subset of financial decision-making that a lot of research has gone into. What we see now is that investing is marketed to inexperienced investors as a “get rich quick” scheme, or almost a hobby. Given that Robinhood has already been in hot water for its marketing tactics, adding this to the list does not make it better. Looking at the app itself, you might not think it’s very special. But the design is quite clever. It actually more closely resembles a game, or online gambling, then it resembles what most people think of as an investing platform. Now you might argue that a lot of experienced traders, professionals and experts see trading as a game anyway. They might. But at the same they know exactly what’s going on. Inexperienced traders don’t. You might as well have put them in front of a bloody slot machine. A lack of commission fees encourages active trading. Active trading which is predominantly done by people without experience when looking at the users of this app. This is just moving the market around, rather than achieving anything. By this stage the investing done through Robinhood by small traders, most likely individuals not working for a trading company, is more like a game, chasing tiny profit margins at the cost of God knows how much time. You’d probably get more utility from playing Candy Crush or Flappy Bird. Or whatever people do these days. It's less risky also! At the same time that people get hooked on moving money around for free and making tiny profits, yet the risk that investing comes with is not negated. Jumping on bandwagons is still a very costly behaviour, especially if you jump on too late. And due to Robinhood’s social aspect, yes this is almost a cult following, there’s a lot of bandwagons going round. Coming back to the business model of Robinhood these bandwagons are very nicely documented for hedgefunds to see. This data is perfect for figuring out where hypes are going to go, which stock is going to up because of the hype, and which will go down eventually once the hype dies down. You might even be able to see longer term bubbles, if you know what you’re looking for. And trust me, they know. And they will bet against you. And often, almost always, they will win. At your expense.


Want to get into investing? Cool! But before you do, do some research first. What stocks are you comfortable with? How much risk are you willing to take? How much money can you miss for how long (next 3, 5, 10, 20 years)? What are the biases that investors suffer and how can you reduce or even negate them? Are you sure you want to manage your investment yourself, or would you rather have someone else do it for you? Active or passive investing? If you’re not even willing to sit down and think about these questions, investing is not for you. And that’s fine. But in that case, don’t think you can take a short cut using apps like this. You’re still dealing with money, your hard earned money. And it deserves the courtesy of being treated with respect, rather than as if it were all a game. It’s not a game once you lose your entire investment. Investing is risky at its very core. If you have gone through all of this, and if you do decide to get into investing and stock trading, may I give you one piece of advice? Don’t do it through Robberhood.


Hi Merle,

As you might guess from my earlier contribution to your blog, I couldn't agree more. Robinhood is doing small traders no favours. As you say "Stealing from the rich and giving to the poor? My ass.". Well put! And the gamification aspect of it is truly shameful and dangerous to its clients. And you didn't even mention the guy who committed suicide when he saw his Robinhood balance going deep into the red, which later (too late) turned out to be him misinterpreting the information on the screen. Perhaps we should start a Reddit sub-group "Stick it to Robinhood!"?

Merle van den Akker
Merle van den Akker

I'm down if you are!


Behavioural Science

Personal Finance