Robinhood ‘makes you addicted’, so you ‘keep spending’, lawmaker warns

Shares of Robinhood (HOOD) began trading Thursday at $38 per share, which equates to a valuation of approximately $32 billion by market cap. Shares failed to surpass their initial price of $38 on Thursday and traded around $36.

While Robinhood’s IPO is a celebratory occasion for the company and investors, US Congresswoman Sean Casten (D-IL) is urging users and potential investors to exercise caution.

“[Robinhood] is a company that, on [its] core, has no economic interest in creating value for investors,” Casten told Yahoo Finance Live on Thursday. “It makes money by letting you 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 hooked and spend money, and then making money on the back as a ratio of how much money the market makers make on the back.

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

Casten joined Yahoo Finance Live to present the “Trading is not a game actand the future of trading platforms as Robinhood makes its public debut.

The law, introduced by Casten along with Congressman Bill Foster (D-IL), would… US 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 into 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’s IPO in New York City, US, July 29, 2021. REUTERS/Andrew Kelly

“[Robinhood has] an economic incentive to bring in and sell money as ignorantly as possible to the most sophisticated people and, with respect for the CFO [Jason Warnick] who will become very rich today is not a model that other broker-dealers follow because other broker-dealers have recognized that there are such huge conflicts of interest there,” Casten added.

A controversial business model

Robinhood, which has a user base of . serves more than 18 million from late March, famously saying it wants to “democratize finance for everyone” — a slogan the company echoed at its recent IPO roadshow. The buzz surrounding the trading platform’s IPO has also raised the question of how the company generates revenue.

Robinhood makes money by payment for order flow (PFOF), which means that Robinhood is compensated for routing stock or other trade orders from its clients to outside companies, who 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 income through PFOF.

“I think that payment for order flow has a value, especially for small, highly liquid commodities, but there is a tension for a company that has an obligation to look after the interests of its investors as your only cash payment for the order flow,” Casten said.

Casten referred to the story of Alex Kearns, a 20-year-old Robinhood user who died by suicide last year when he was informed by the company that his account had a negative balance of approximately $730,000. Kearns’ family is now suing Robinhood for targeting inexperienced investors and “aggressive tactics” leading to his death. The complaint states that Kearns did not actually owe the money because his losses were allegedly covered by options in his account.

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

Following Kearns’ death, Robinhood released a statement saying it had improved its customer service, including providing live telephone support for customers with open option positions.

“We were devastated by the death of Alex Kearns,” Robinhood said in a statement quoted by CNN. “We remain committed to making Robinhood a place to learn and invest responsibly.”

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