WARNING: This article mentions suicide. If you or someone you know is having thoughts of suicide, the national suicide and crisis lifeline is available at 988.
In June 2020, Alex Kearns took his own life to spare his family from financial ruin. He had been using Robinhood for almost two years, but only recently ventured into options trading. Shortly before Alex’s suicide, the company demanded he deposit nearly $200,000 to meet a margin call. He had never enabled margin. Despite this, Robinhood told him he owed $750,000 million. His three emails to the company pleading for them to investigate went without reply. Alex typed a suicide note, saved a screenshot of his account balance, and threw himself in front of an oncoming train.
Kearns was a 20-year-old business student and ROTC cadet at the University of Nebraska. His life had been upended by the Covid-19 pandemic. He was living at his parents’ home. Alex exemplifies the typical Robinhood user: young, curious, and inexperienced with securities trading. The app appeals to this group with simplistic design, inviting graphics, and offers of free stock. This false simplicity may have led to Alex’s death. The screen showing Alex’s negative cash balance was only half of an incomplete trade — lacking critical details. After Alex died the company emailed him stating that he did not owe any money because his positions were covered. If Robinhood had presented information differently, he might be alive today.
Robinhood and other commission-free brokerages have successfully tapped into a new and robust market. They attract young investors by portraying securities trading as a fun, riskless game with frictionless design and lofty mission statements. Through biased and one-sided “education,” they guide users toward frequent, aggressive, and overconfident trading. Retail traders likely suffer from the aggressive trading strategies many commission-free brokerages encourage. Yet much of their profitability depends upon driving retail trading — communications that rile up a user base getting them to tap, tap, tap their way to transactions. The Securities and Exchange Commission (SEC) and Congress have both called for closer examination of these practices.
The existing regulatory regime overlooks the behavioral and psychological impacts of strategies relied upon by commission-free brokerages. Robinhood and others like it use gamification and biased education to rile up investors, inducing more active trading instead of making traditional recommendations. They avoid responsibility because the law does not yet clearly recognize these strategies as recommendations though they have the same effect. They remain in the law’s (and often arbitrators’) blind spot. To take a more realistic approach, regulators need to reconsider what qualifies as a recommendation and adopt a broader, more functional lens that includes the tactics and stimuli used to induce trading.
Editor’s note: The above is an excerpt from the full article of the same name, originally published by the Public Investors Advocate Bar Association in the PIABA Bar Journal. Travis Studdard, a recent graduate from UNLV’s William S. Boyd School of Law, won a Burton Award for legal writing for the research paper he penned while still a student. You can read the full article here.