GENERATION ROBINHOOD: How the trading app conditioned its inexperienced users to obsessively play the market

• By all indications, Robinhood has become the investing app for beginner retail traders.
• Its sleek design, flashy features, and simple interface have attracted 13 million users since 2013.
• Insider spoke with 10 users and industry experts to find out how Robinhood has transformed trading. 
• Visit Business Insider’s homepage for more stories.

James Orellana was waiting tables during the pandemic when he decided to give Robinhood a try.

The 26-year-old Rutgers University grad wanted to learn how to invest in the stock market but had no idea where to start. Then someone he knew recommended Robinhood as an easy-to-use app that was good for beginner investors. 

Orellana deposited $100 into his account on April 29 and bought his first stock — a single share of Exxon Mobil — for $45.80 on May 1.

“When I first started, I was looking at all these numbers and terminology I didn’t understand,” he said. “And I remember telling myself that one day, if I just keep looking at this app for hours and days, I’ll eventually learn what I don’t know. That’s exactly what has happened.”

In the nine months since that first trade, Orellana has enjoyed the highs and lows that come with playing the market. He made $7,000 trading shares of Workhorse, a manufacturer of electronic delivery and utility vehicles that saw a massive spike in its share price during the pandemic, and Palantir Technologies, the secretive tech company that went public in September. But he also lost “a lot of money” dabbling in call options on Boeing, he said.

Along the way, Orellana learned something else. Robinhood isn’t just informative — it’s also incredibly addictive. Like many apps, it was specifically designed to keep users hooked on an endless feedback loop of action and reward.

In his first eight months on Robinhood, according to the end-of-year recap provided on the app, Orellana made 528 trades. That’s three trades a day for every day the market was open since his first purchase.

But even more telling is how many times Orellana tapped on Robinhood to check on his investments. He used the app 5,993 times — about 25 times a day — to check the share price of Tesla, a stock he bought in June.

Such a high level of customer engagement is thanks largely to Robinhood’s sleek user design and experience. From getting a free stock for signing up to receiving a shot of digital confetti when a trade is made, the app’s features go a long way to prod users to buy and sell at a frenzied pace.

The app’s power to move markets has been very much on display in recent weeks as an army of retail traders, many of whom use Robinhood, have piled into stocks like GameStop and AMC Theaters, sending the prices surging to dizzying heights. The volatility got so intense that Robinhood was forced to put restrictions on some stocks as it worked to meet new margin requirements established by its clearinghouse.

The app aims to make trading easy and fun for a simple reason: The more users trade, the more money Robinhood makes. The startup’s business model, in fact, is based in large part on what is known as payment for order flow (PFOF) — taking the buy and sell orders that users place and selling them directly to large trading firms. In short, Robinhood makes its money like many other Silicon Valley companies — by attracting users to its app with free services, then charging others for access to those users.

That gives Robinhood a built-in financial incentive to encourage more trading. In the fourth quarter of 2020, according to data collected by Piper Sandler from regulatory filings, the startup received more than $221 million in PFOF from equities and options. While the company does not disclose its financial details, that flow of cash is one of its key revenue drivers and essential to its overall valuation of $11.7 billion.

Robinhood, meanwhile, is up front about its efforts to make trading as easy and enjoyable as possible.

“We designed Robinhood to be mobile-first and intuitive, with the goal of making investing feel more familiar and less daunting for an entire generation of people previously cut out of the financial system,” a spokesperson told Insider. “Our focus has always been on breaking down systemic barriers to investing to help more people take control of their finances.” 

There’s one problem, though, with applying such techniques to simplify stock trading: Robinhood isn’t a game, but rather a broker-dealer. On December 16, Massachusetts regulators filed a complaint against Robinhood, alleging in part that the company had used “strategies such as gamification to encourage and entice continuous and repetitive use of its trading application.”

The complaint called out Robinhood’s confetti celebrations when trades are submitted, as well as a promotion the startup ran where users continuously tapped a virtual debit card in the app to improve their spot on a waiting list for its cash-management feature.

It also alleged the company failed to vet and protect inexperienced users as required by state standards. One trader “with no investment experience,” the complaint said, made “more than 12,700 trades in six months.”

A Robinhood spokesperson disputed the complaint’s allegations and said the startup intended to defend itself “vigorously.” But according to leading academics, lawyers, and industry experts interviewed by Insider, the complaint in Massachusetts may represent only the first in a wave of regulatory action over how far apps like Robinhood are permitted to go in their quest to draw in inexperienced users and encourage them to trade stocks at frenetic levels.

“It’s a new kind of case, but one that’s much more sensitive to the human psychology of using these apps,” Talia Gillis, an associate professor at Columbia Law School who studies consumer behavior and financial regulation, told Insider. “We’ve got much more subtle ways, according to the complaint, that consumers are being advised or pushed in certain directions.”

‘A strong game mechanic’

Robinhood is part of the emerging industry known as financial technology, or fintech, that seeks to disrupt myriad ways Wall Street has traditionally operated by employing the innovations of Silicon Valley. Trading is one of the best examples of that, as the recent run-up in GameStop shares would not have been possible without the 13 million users Robinhood attracted since its founding in 2013 with its commission-free, streamlined trading experience.

Much of Robinhood’s audience, which tends to skew younger than those of traditional brokerages, grew up using smartphones and expect mobile experiences to be easy, fun, and catchy. The startup has catered to that crowd with its design much in the same way modern dating apps have been built for a younger generation, Niloofar Abolfathi, a business professor at the National University of Singapore, told Insider.

Abolfathi is researching how Robinhood’s rise mirrors that of Tinder. Both apps, she told Insider, have been successful at creating an entirely new customer base for their services, rather than subverting an existing one.

“Both apps knew their target segment,” she said. “And they designed the app in a way that is appealing for the segment.”

Users have learned firsthand how easy — and addictive — Robinhood can be.

Hermann Peterscheck, a hedge-fund manager in Gualala, California, downloaded Robinhood in December to find out what the buzz was all about. Signing up, he discovered, took only five minutes. New users need to submit only some personal information — including their citizenship, Social Security number, employment, and a driver’s license — and then fill out a single page with questions about their investing experience (ranging from “none” to “I’m an expert”). 

Peterscheck — who previously worked as a game developer at Riot Games, the company behind one of the most popular video games, “League of Legends” — told Insider he was also impressed by the ways Robinhood employed different techniques to drive trading. 

For starters, Robinhood gave him a free pharmaceutical stock — OPKO Health — simply for signing up. Such gifts, he said were “a strong game mechanic,” establishing a system of rewards for desired behaviors.

Robinhood also rewards users with free stocks for every new user they bring in, further deepening their engagement and relationship with the app. The promo, highlighted by a button at the top right of the user’s home screen, offers a “100% chance to get a free stock” worth up to $500 and “unlimited invites.”

“If I give you something free, you feel compelled to do something for me,” Peterscheck said. “And then this idea that if I share with you, we both get something free, that’s just this huge viral coefficient.”

While free stocks struck Peterscheck as a smart strategy to spread awareness and increase virality, the “scratcher” function — whereby Robinhood users discover which stock they have been gifted in the same way they would uncover a lottery number — made him “uncomfortable,” he said.

“I was like, ‘Wow this is really a gambling mechanic in some way,'” he said. “Not completely because I didn’t buy the scratch ticket or anything. But it gives me that feeling of: how do I get more scratch cards?”

Navigating the app is fairly easy too. Robinhood users can switch between line and candlestick charts with the click of a thumb, hover over a single point in time to pinpoint the share’s price and percentage change over a select period of time, and watch a small circle ping green or red periodically when the stock price changes.  

When users want to trade options, they’re presented with line charts rising and falling and a message reading “I think it’s going up” or “I think it’s going down.” Selecting the former, for example, will take users to a page where they can place an order for a call option and select expiry dates and strike prices.

The app’s glowing colors and high contrast, along with its simplified usage of numbers and fonts, create a pleasing experience for users, Peterscheck said. Overall, Robinhood has the best user interface and user-experience design of any investing app he’s ever seen, making it the “best and fastest platform to start investing,” he added.

More trading means more money

The effort Robinhood makes to keep customers engaged — from flashy graphics to an intuitive design and omnipresent push notifications when a share price makes a significant move — is largely motivated by its business model. By relying so heavily on PFOF, the startup has directly staked its financial success to its ability to drive trading.

“The financial industry is mostly about harvesting transaction costs somehow,” Peterscheck said. “A trading platform does not benefit a lot if you log in once, put all of your money into an index fund, and then never log in again.”

It’s not just a matter of keeping users trading. The types of trades matter too. Robinhood’s fee structure for PFOF is designed to give the company a fixed percentage of the bid-ask spread of a stock. That means Robinhood gets paid more for customer orders in stocks that have wider spreads and are less heavily traded.

The Robihood app also suggests similar securities to the one users are looking at.Robinhood

Options also fetch more money. More than half of Robinhood’s PFOF revenue in the fourth quarter — $142 million — came from options. They also fetch a higher price per share ($0.0062) than equities ($0.0023).

And Robinhood doesn’t shy away from letting its customers know that options trading is, well, an option. If users answer the initial question about their investing experience with either “I know what I’m doing” or “I’m an expert,” they’ll be redirected to a page that asks them if they want to enroll in options trading. And users who aren’t approved to place options orders when they first open their accounts can qualify to do so simply by trading a certain amount of cash stocks.

The approval process is something that caught the eye of regulators in Massachusetts. According to the complaint there, “approximately 68% of Massachusetts customers approved for options trading on the Robinhood platform identified as having no or limited investment experience.”

PFOF is common in the financial industry. TD Ameritrade, E-Trade, and Charles Schwab, among others, all receive payment for their flows. But Robinhood’s lack of transparency about its business model has landed it in the focus of the Securities and Exchange Commission. In December, the company agreed to pay a $65 million fine levied by the SEC because it failed to adequately disclose to users that Robinhood makes money through payment for order flow.

The startup now has a page on its blog outlining how it makes money that includes a description of PFOF. Additional revenue streams come from its premium subscription service, securities lending, and interchange fees from its cash-management offering.

To be sure, traditional online brokerages have long used tools like television commercials and discounted or free stock research to encourage their customers to keep trading. Robinhood’s innovation was simply to update those techniques for a mobile-savvy audience — and ramp up trading to a scale that traditional brokerages could only dream of.

Peterscheck remembers the 1990s, when brokerages like E-trade and TD Ameritrade ran commercials “encouraging people to day trade — that anybody can do it, that you can get rich doing it, that it’s way better than going to work,” he said. “Like: All those idiots who are just working 9 to 5, don’t be like that. Stay home, day trade, get rich. That’s the same kind of gamification,” he added, referring to his assessment of the commercials’ sentiment.

Gamified or responsive?

According to experts, Robinhood has been successful because its app taps directly into the way its users think and feel.

“That is done in many different ways,” Jan Plass, a professor at New York University who studies cognitive science and educational digital technology, told Insider. “It’s based on a deep understanding of human psychology, and especially of the target audience that you’re getting.” 

To Plass, who is also a Robinhood user, the app is not so much “gamified” as it is “responsive.” A responsive app, he added, is one that is designed to be more enjoyable to use through its visual appeal and ability to anticipate and adapt to the needs of users.

But while Plass has no qualms about Robinhood’s easy-to-use functionality, calling it “a great feature,” he does raise issues with its lack of educational tools for new investors. 

Plass compared it to building a slide for kids that drops downhill into a lake. Going down the slide may be a fun experience, but a hazard awaits whoever takes the plunge. 

“Once you then lead people to be able to perform a certain task, you need to be responsible as a company what those tasks are,” he said. “That is something that when you think about it, you would fault any website, gamified or not, for doing that.”

But while some experts and regulators have criticized Robinhood’s approach to attracting and retaining customers, many users of the app told Insider they had no problem with it — even after the GameStop frenzy.

Sunny Goklani, a 33-year-old analyst for an energy consulting firm in Philadelphia, started using Robinhood in 2015. He’s aware of the complaint brought against the company in Massachusetts, but he doesn’t blame Robinhood for people who might misuse the app.

Robinhood’s app also includes a list of its most popular stocks.Robinhood

“It’s like blaming a social-media platform for getting you addicted,” he told Insider. “Well then, there’s a void in your life that you need to fill somehow. If there is a problem of addiction, then there’s a different problem to be addressed, but it’s not Robinhood’s problem.”

Spencer Ong, who works in clinical research in Virginia, credited Robinhood with giving him the opportunity to enter the high-risk, high-reward world of options trading.

“I basically only do options now,” he told Insider. “I think trading stocks is just boring.”

Despite having made 823 trades on Robinhood last year — and checking Tesla 3,812 times — Ong said he didn’t feel that the app’s features and notifications encouraged him to trade more. A “proud supporter and user of the app,” he pointed to free services provided by the company, including a newsletter that gives a rundown of the day’s top business stories, as evidence of Robinhood’s commitment to educating users.

Jasir Jilani, a graduate student at Columbia Business School who runs a Discord chat group that provides trading research and analysis, praised Robinhood for helping to educate young, inexperienced investors who are still in their teens. “It increases their financial literacy, at least in terms of their personal investing endeavors,” he told Insider. 

He said the euphoric market environment, more than the app’s stickiness, is what’s driving engagement on Robinhood. But he acknowledged that a deeper understanding of what makes markets move — beyond news or hype — wasn’t always considered by new users looking for big returns. 

“Understanding the technical analysis of a chart or all of these kinds of things are lost in translation, especially for new Robinhood traders,” he said.

Instead, a lot of users just end up chasing performance, he said.

“That’s the part that scares me,” Jilani added.

Investing to learn or learning to invest

But not everyone is as sold on Robinhood. Kayla Kilbride, a 24-year-old TikTok influencer, has been posting investing content for her more than 77,000 followers under the username RobinhoodKid since the start of the pandemic. While she likes the app’s social-media-like format, she worries that the way it’s designed — including stocks flashing green and red — can lead inexperienced investors into making rash decisions, she told Insider.

The app’s lack of tools, she added, exacerbates its tendency to make investors, herself included, trade emotionally. Its candlestick charts, a commonly used financial chart to indicate price movements, and key indicators, such as a stock’s price-to-earnings ratio and dividend yield, were “entirely lacking,” she said.

“With no indicators and no charts to read or scan or confirm, the trades that you’re making are based on the colors that you’re seeing,” she said. “And the way to get a new investor to buy is to show them green and show them red. They’ll jump out.”

In the end, she said, what makes the app so successful is also what makes it so dangerous: “Robinhood has become a place where it’s really easy for me to trade — and really easy for me to emotionally make decisions.”

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