Robinhood may have taken its name from the legendary hero who kept the people's best interests in mind, but it may not actually be the "savior" it appears to be. The trading app, which aims to help everyday people with their investing needs, was recently called out by U.S. Congressman Sean Casten for its allegedly deceiving business model and underlying motives. Speaking to Yahoo Finance Live, Casten claimed that Robinhood "is a business that, at its core, has no economic interest in creating value for investors."
"It makes money by getting you to come to their site, by using the tricks that Facebook and YouTube and these other social media companies use to get you addicted and keep spending money, and then makes money on the backside as a proportion of how much money the market makers make on the back end," he continued.
The congressman is looking to introduce the "Trading Isn't A Game Act," which aims to study the impact of the gamification of online trading platforms. It will look at everything from marketing strategies to consumer behaviors in order to assess the addictiveness of the platform. According to Casten, Robinhood presents an economic incentive to "bring in money that is as uniformed as possible and sell it to people who are as sophisticated as possible."
"With respect for the CFO [Jason Warnick], who's going to become very wealthy today, that's not a model that other broker-dealers are emulating because other broker-dealers have recognized there are such massive conflicts of interest there," he added.
As of March, Robinhood has attracted over 18 million users with its promise of "democratizing finance for all," but its rise to fame has not been without controversy—last year, a 20-year-old man named Alex Kearns took his own life after the company notified him that his account was in the negative by a staggerring $730,000. According to his family, who is now in the process of suing Robinhood, the company is guilty of targeting inexperienced investors like Kearns and using "aggressive tactics" that can influence aimless trading.
Soon after his death, Robinhood released a statement vowing to improve its customer service and include more support options for its users. "We were devastated by Alex Kearns' death," the statement read. "We remain committed to making Robinhood a place to learn and invest responsibly."
Casten's criticism of Robinhood comes at the same that the trading app went public. Robinhood's stock began trading last Thursday at $38 a share, which equates to a $32 billion valuation.