◼ FINANCE Bloomberg Businessweek March 8, 202128
William Galvin is as old school as they come, even
for a state securities regulator. Galvin, 70, drives
an Impala, uses a flip phone, and leaves the email-
ing and tweeting to his staff. But he may turn out to
be the worst nightmare of Robinhood Markets, the
company whose zero-commission brokerage app
captivates millennial and Gen Z investors.
Galvin is the secretary of the commonwealth of
Massachusetts, a position he’s held since 1995, when
the founders of Robinhood were still in grade school.
In that time, Galvin turned the office that oversees
elections, historic preservation, and record- keeping
into a financial regulator that’s sometimes ahead
of its national counterparts. He’s won penalties
from such Wall Street giants as Morgan Stanley and
Goldman Sachs, as well as local icons like the mutual
fund manager Putnam Investments.
In December his office sued Robinhood, alleging
that the trading platform violated state law by
emphasizing the addictive thrills of trading over
helping novice investors learn how to make sound
investment decisions. He says the company’s
brightly designed smartphone app is promoting
the “gamification” of investing with features such
as animated confetti when users make their first
transaction and promotions giving away free stock
for signing up or referring friends.
Although the company doesn’t charge commis-
sions, it makes money from trading activity because
outside firms such as Citadel Securities pay to be
able to fill Robinhood customers’ orders. (Those
firms can earn profits on tiny differences in mar-
ket prices.) Robinhood co-founders Vlad Tenev
and Baiju Bhatt could become billionaires after an
initial public offering, which could take place within
weeks, Bloomberg has reported.
The founders named the company after the
medieval outlaw who stole from the rich to give
to the poor, modernizing the myth with the tag-
line that they’re “democratizing finance.” It’s a
slogan that doesn’t impress Galvin. “It’s not quite
fair to democracy,” he says in an interview, sitting
among birth and death records at the Massachusetts
Archives building. “It’s propaganda.”
While Galvin has a long history of being a reg-
ulatory activist, his questioning of Robinhood isn’t
just headline chasing, says John Coffee, a Columbia
law professor. The Financial Industry Regulatory
Authority, the Wall Street-backed regulator that
oversees brokerage firms, “should have been doing
this for some time,” he says.
The U.S. Securities and Exchange Commission
and Finra have uncovered some lapses: In 2019,
Finra fined Robinhood almost $1.3 million over
how it routed customer orders. In December theSEC penalized the company $65 million for failing
to properly inform clients that it sold their stock
orders to high-frequency traders and other firms.
Robinhood said then that its settlement with the
SEC related to past practices and that it’s transpar-
ent about how it makes money.
Galvin says he can act more quickly than other
regulators. The SEC, he says, has a more deliberative
process, whereas his team of about 30 enforcement
staff often hear directly from aggrieved investors.
Galvin also has a tool the SEC doesn’t: His complaint
alleges that Robinhood violated a new state rule that
holds brokers like Robinhood to a fiduciary standard
of care, which means putting customers’ interests
above their own.
A Robinhood spokesperson says that because
the app makes no recommendations, the company
doesn’t have to meet a fiduciary standard. By elim-
inating commissions, the company estimates it’s
saved Massachusetts customers about $180 million
to $360 million in trading costs since December 2017.
It’s denied gamifying its app in a way that encour-
ages frequent trading and has said customers tend
to trade less the longer they stay on the platform.
Galvin won’t necessarily have an easy road, says
Abu Jalal, a finance professor at Suffolk University
in Boston. He must prove that Robinhood’s features
are materially different than those offered by other
trading platforms. “There’s still a bell ringing or a
text sent when your order has been filled,” Jalal says
of other brokers’ apps. “And you can still go in and
see if you managed to make some money.”
The difference, Galvin says, is that Robinhood’s
design encourages customers with no experience to
make trades, including bets using margin, that could
quickly ruin them. “I don’t have a problem with
risk,” he says. “I do have a problem when investors
are naively told they can do this. They deliberately
target young people.”
Another challenge for Galvin: While he thinks
retail investors need to be protected from their worst
instincts, the new crop of online traders may not
appreciate such paternalism. The Robinhood app
helped enable much of the recent frenzied trading in
GameStop Corp., which Galvin also decries. Shares
of the video game seller experienced wild price
swings after it became a favorite on Reddit discus-
sion boards. In late January, when Robinhood was
forced to temporarily prevent clients from buying
some stocks including GameStop, the outcry from
customers was loud. Dave Portnoy, a day trader and
founder of Barstool Sports Inc., asked Tenev in an
interview following the outage: “You know every-
one watching this hates your guts, right?” Tenev
responded “That’s what I hear.”“He’s unafraid
to stand up on
his own, alone,
and say this is
the right thing”