Robinhood’s Gamification of Investing Combines Surveillance Capitalism With Finance Capitalism

GettyImages-1229066239

Image: Mike Egerton/PA Images via Getty Images

Investing with Robinhood is more popular than ever, especially with young people and new investors. The brokerage platform has grown from 10 to 13 million users in 2020, many of whom are first-time traders. As the pandemic continues to wreak economic havoc, the possibility of making quick gains on the market is all the more appealing to younger people. With a median age of 31, the typical Robinhood customer is as interested in short-term cash flows as they are in long-term planning. 

Robinhood was inspired by economic crises in the first place. According to the Wall Street Journal, founders Baiju Bhatt and Vladimir Tenev came up with the concept in 2011, during the heyday of Occupy Wall Street. At the time, the best friends developed algorithmic trading tools for hedge funds in New York City. As they explained, Occupy alerted them to the moral hazards of their work. The pair decided to return to California, where they’d met years earlier at Stanford University. After a successful venture capital campaign, they launched a startup designed to “democratize finance,” a goal which is codified in the Robinhood mission statement. Specifically, they envisioned an app that would cut trading costs to zero. It was a renegade idea: at the start of the 2010s, most online brokerages charged $5-$10 dollars per transaction. When nearly a million people pre-registered for accounts, it was obvious that they’d tapped into a new market. All of a sudden, buying stocks was as easy as paying with Venmo, and the world of investing would never be the same.

Robinhood first caught my attention in 2017, when I was studying the economics of data-driven platforms for my Ph.D. I checked it out on a friend’s advice, and immediately felt uneasy. I had opened an account with Fidelity the year before, which charged $5 per transaction at the time. While I didn’t appreciate the hit to my wallet, I also suspected that Robinhood was doing something to offset trading costs. Its recent growth rekindled my curiosity about its business model. The more I looked into it, the more that Robinhood’s democratic messaging seemed like empty PR. By all appearances, the company exploits a knowledge deficit among its customers. And it does so while promoting a superficial form of financial literacy that downplays the dangers of the market.

User education is a major part of Robinhood’s online presence. Its website features lessons with such titles as “The Market Has Been Super Volatile — How Can I Make Sense of It?” and “How to Start Investing for as Little as One Dollar.” These articles encourage a learn-by-doing approach informed by pithy advice. “The more you get to know yourself, the better an investor you’ll be,” declares a piece on portfolio diversification. Another compares the notion of free enterprise with grade-school recess: “the teacher (the government) will only step in if someone’s in danger of serious harm.” Regardless of these efforts, Robinhood has been dogged by controversy. While the company simplifies financial lingo like “strike price” and “asset liquidity,” it’s less forthcoming about the strategies it uses to keep customers hooked, including a game-like interface.

Although most apps are gamified, few carry the potentially devastating risks of Robinhood. Earlier this year, 20-year-old Alexander Kearns killed himself after his balance displayed a loss of more than $700,000. For privacy reasons, Robinhood is not releasing details, but it’s likely that the debt reflected a temporary discrepancy rather than his actual statement. While the issues leading to his death are undoubtedly complicated, Kearns named Robinhood directly in his suicide note. “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?,” he asked. In all likelihood, he hadn’t been given that much credit, but for some reason that wasn’t apparent.

Despite its rhetoric of openness, Robinhood is ushering in a trend toward economic inscrutability. Historically, the stock market is the cornerstone of finance capitalism, a form of enterprise where the business of making money eclipses the production of goods and services. Under finance capitalism, you can grow or shrink your wealth through the exchange of stocks, bonds, and other financial assets. Online trading blends finance capitalism with surveillance capitalism, an economic framework where businesses profit from an endless stream of user-generated data—typically by selling it to third parties, and sometimes by analyzing it to improve their own products.

All online brokerages combine finance capitalism and surveillance capitalism, but Robinhood perfected this approach by emphasizing the latter. One source of revenue is Robinhood Gold, a subscription service which bundles exclusive stock analyses with access to company-backed credit. Gold Subscriptions are a mainstay of digital commerce, since customers feel obligated to interact with products that they pay for, which in turn generates valuable data. At $5 a month, Robinhood Gold is a popular add-on that helps them keep basic features free.

Robinhood also makes money with a practice known as “payment for order flow.” Through payment for order flow, investment firms receive compensation for directing orders to “market makers,” or high-frequency traders that act as financial wholesalers. Market makers exist so that when customers want to buy or sell assets, a merchant is always there to complete the other end of the deal. Firms are reimbursed for sending orders to specific market makers, who are supposed to fulfill them for the lowest price available. In theory, this helps companies like Robinhood reduce fees for customers. But it’s controversial, because it creates an incentive to send orders to market makers who offer sizable rebates to companies as opposed to low prices for individual traders.  

Payment for order flow was developed by Bernie Madoff (of Ponzi scheme infamy) in the 1980s. It grew alongside the internet, which helped to expedite communication between customers, brokerages, and market makers. These days, most trading platforms use it to supplement their income. Last December, they were fined over a million dollars for not ensuring that customers receive the best prices from market makers. As a result of “the Robinhood effect,” older firms like Fidelity and TD Ameritrade have been forced to lean harder on payment for order flow so they can offer commission-free trading. This entire trend pushes the entire industry toward the economic inscrutability I mentioned.

Meanwhile, Robinhood’s combination of accessibility, gamification, and a user base that can’t remember life before the internet is spawning a surreal new culture of investing. Screenshots of high-risk wagers are a staple of subreddit r/wallstreetbets (tagline: “like 4chan found a Bloomberg terminal”). Every day, tens of thousands of Redditors converge on the forum to discuss financial news, ask for advice, and explore new trading possibilities. They also cheer on foolhardy investments, sling profanities, and generally do a lot of shitposting. 

Amid wallstreetbets’ manic, gleefully offensive updates are stories of staggering defeat, AKA “loss porn.” I talked to loss porn hall of famer u/bearincarnate, a self-described gambling addict in his late 20s. Before discovering the stock market, he’d accrued a few thousand dollars’ worth of debt from casino games.

As he puts it, trading on Robinhood was a safer and more respectable alternative. “I never got even in a casino,” he writes, “but I did start to see an overall profit from investing.” And so a new compulsion was born: “I started doing more research about investment strategies, taught myself about options trading, and gave it a go.” A series of losses made him stop temporarily, which he recounts as a stable, positive period in his life. But that all ended this year, when COVID-19 lockdowns left him bored at home. “I watched others make and lose fortunes on the volatile pandemic market,” he said. “I decided to try again, telling myself I’d be smarter.” This culminated in a one-day loss totaling more than $28,000.

Bearincarnate doesn’t blame Robinhood for the fallout. After all, he already had a history of reckless financial behavior. Nevertheless, he describes their style of user encouragement as “predatory.” To this point, he sent me the message he received after selling 200 losing contracts:

“Success! Your order to sell to close 200 contracts of SPY $344 Put 8/26 has been filled for an average price of $4.00 a contract.” 

While this feedback does not make me feel better (I averaged $105 per contract buy and sold at $4) it does show Robinhood’s intentions,” he said. 

In a final post to wallstreetbets, he assured fellow redditors that he wouldn’t hurt himself, but also mentioned that he wouldn’t be updating the forum any more. “I don’t want this to be entertainment,” he told them.

This probably isn’t what Bhatt and Tenev had in mind when they left Wall Street to “democratize” finance. But it leaves users to wonder if lack of experience plays right into Robinhood’s business strategy, which banks on customers’ naivete by giving them just enough information to feel like they’re in control. If a little knowledge is a dangerous thing, Robinhood may be the ultimate losing bet. But while the reasons for criticism keep piling up, so too do new customers. Robinhood isn’t going anywhere anytime soon, leaving the next generation of investors to gamble at their own risk.