How Robinhood Is Mimicking Your Friendly Neighbourhood MLM

Photo by Sincerely Media on Unsplash

How both use gamification to lure users in — and keep them there

Hey girl! I was just going through your profile and think you will be a perfect fit for this amazing business opportunity I have. It will give you a free car, infinite income, and complete freedom of time!

Sounds familiar, right? If you’ve ever been ‘reached out to’ (or attempted to be scammed, more appropriately), you would have received some version of this message. It might have increased your heartbeat for a second, thinking an old friend still remembered you and wished you well.

It might then have sunk all hopes in humankind when you realised that it was just another invitation to be a #bossbabe. Or, you might actually have fallen for the bait, and had to sit through an ‘opportunity call’. My condolences.

But what does that have to do with Robinhood? The app that has brought investing and trading to every millennial and Gen-Zer, with its cute interface and zero-commission?

A peek behind the facade, however, reveals some eerie similarities. Now, I am not saying that Robinhood isn’t a legitimate business and a good one at that, but shady practices are shady, whether they are done by our favourite fintech app, or just the neighbourhood hun.

They make money in ways that are not completely transparent

Where does the revenue for an MLM come from? Well, if you believe them, it comes from the sale of the very (unnecessarily?) expensive products.

But if you have an inclination for facts and statistics, then you might believe that most of their profit actually comes from the 99.25% of independent distributors who lose money. Not something that was part of the endless Insta stories, right?

Let’s look at Robinhood now. While it has never been a secret that Robinhood doesn’t charge for trades, there hasn’t been much of a pause to think where it is getting its money from instead.

Maybe we as a generation are too inured to having ‘free’ apps which sell our personal data to give this one a second thought. Or maybe, all the slush PE and VC funds investing in consistently loss-making companies made us forget that the primary purpose of business is, in fact, profit.

But Robinhood is not a loss-making company — as far as we know, since it is pretty secretive about its numbers. What we do know is that Robinhood makes a significant chunk of its revenue — up to 40% — by something called ‘payment for order flow’.

Basically, when you place an order on Robinhood, it can have the order executed by one of many ‘market-makers’. These market-makers pay Robinhood for these orders. Why? Because they make money by executing your trade and hence share a part of the booty with Robinhood to incentivize more orders coming their way.

All is well, till now. All of this is legal and above board. You as a customer don’t lose and are not charged for your trades. Robinhood makes its money. The market-maker gets its spread from executing your orders.

But the strange part is that, somehow, Robinhood is able to get a lot more in payment from these market-makers (about a cent per share compared to 1/10th of a cent per share that other brokers like Vanguard are able to command — please note that these are estimates since Robinhood doesn’t disclose this data).

It is anybody’s guess why this is, but it is something to be pondered: Why is the data that Robinhood provides to the market-makers more valuable than that provided by other brokers?

The target audience is inexperienced and vulnerable, and they are pulled in deeper than reason would dictate

We all know that MLMs target the most vulnerable of women (yes, predominantly women) — stay-at-home moms, military spouses, young students — who want to earn income independently while not having the time or flexibility to do traditional jobs.

We also know that MLMs encourage their distributors to get in debt to ‘invest in their business’, promising that they might recoup that much and more soon enough. According to a survey of MLM distributors, 31.6% said they used a credit card to finance their involvement in the business, 9.1% of participants reported taking out a personal loan, and another 20% said they borrowed money from friends and family members. That is too much debt for a business whose hourly income is less than a dollar.

The point being that MLMs certainly encourage risky financial behaviour which can have long-term consequences for their participants, who are usually inexperienced.

But what about Robinhood? Aren’t they trying to foster a culture of investing, which is the exact opposite of risky financial behaviour?

Robinhood’s average user is 27 years old, the demographic ranges to 35, and a quarter of them are first-time investors.

Which is in keeping with their mission of opening up the world of investments to first-time investors. But the problem is that the app incentivises highly risky behaviour among this inexperienced group — including trading in single stocks as opposed to mutual funds or ETFs, and even trading in the highly risky options (68% of customers were approved for options trading after reporting limited or no investing experience).

Does the benefit of opening up the world of investment to beginners outweigh the risks to their long-term financial health?

They rely on engagement to keep customers roped in

MLMs gamify the lives of their distributors. What do I mean by that?

All MLMs work on a tiered structure for their distributors, with each tier representing greater rewards and a slice of heaven. They work on the tendency of humans to focus on the next attainable reward and the associated dopamine hit, to incentivise them to work harder, recruit more people, and even allegedly buy ranks.

ItWorks 2018 Income Disclosure Statement showing average monthly income across all ranks to be $208

Who wouldn’t want to be known as a double diamond, advancing from being just a diamond, right? Imagine the social media posts.

Coming to Robinhood, it actually is being investigated for using gamification strategies. A few of its more sinister techniques are:

  • The app sends push notifications to push investors into frequently trading on their app — which is not the best way to trade for an investor.
  • Milestones like the first trade are celebrated using confetti animation.
  • Investors can snag a share of a high-price glamour stock such as Apple Inc. if they get a friend to sign up, importing their social circles into their platform.
  • They can browse the 100 most-held stocks among fellow users, for some much-needed social validation.
  • They have successfully managed to capture eyeballs on other platforms like TikTok — videos under #robinhoodstocks have millions of views.

Here’s an article on how Robinhood’s gamification leads to sub-optimal outcomes for its users, and why it is being investigated:

To paraphrase, both the alleged culprits use gamification to modify user behaviour to their own detriment, but the monetary advantage of the platforms.

Emphasis on winners and de-emphasis on facts

MLMs are notorious for highlighting their top 1% who have managed to make some money off all the huns losing out — just take their annual conferences. The top earners are championed and treated like celebrities, to keep the illusion of being able to make a living wage alive.

The Income Disclosure Statements, which say otherwise, are quietly buried.

But what about Robinhood? Well, Robinhood also used to run leaderboards to show the most popular trades on its platform — a feature it quietly turned off when the criticism of encouraging FOMO trades started escalating.

Whereas investing and holding strategies, which are the most profitable for building wealth in the long-term, especially in mutual funds or ETFs, are nowhere to be found even on their Investing 101 pages, purporting to teach investment basics to their consumers.

Suffice it to say, that the glorification of the winners at the cost of almost burying the reality, is a common feature — and one that benefits only the platform.


Your financial health cannot be trusted to any platform that benefits from its deterioration — that is just Capitalism 101. It seems that caveat emptor (or buyers beware)is still a useful adage!

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