Joe Biden’s market watchdog to put trading apps like Robinhood under new scrutiny

Gary Gensler speaking in 2013

Credit: Reuters

Joe Biden’s incoming markets watchdog has indicated he will investigate trading apps such as Robinhood after the smartphone brokerage’s central role in the GameStop trading controversy.

Gary Gensler, the US President’s pick to run the Securities and Exchange Commission, outlined concerns about the design and business model of Robinhood, which has been criticised for gamifying investing and encouraging risky trading.

“Technology is providing greater access, but it also raises interesting questions… what does it mean when balloons and confetti are dropping and you have behavioural prompts to get investors to do more transactions,” Mr Gensler told US Senators in a confirmation hearing.

He added that he would closely scrutinise Robinhood’s business model, which allows users to trade for free but takes payments from market makers to execute the trades, a model that has led to fears traders are being ripped off.

“[It] appears to be a free trading app, but then there’s this payment… [a] behind the scenes business payment for order flow. We think we’re going to need to study that and think about it.”

Robinhood, which was last year valued at $11.7bn (£8.4bn), is reportedly preparing to file for a New York flotation in the coming weeks.

Robinhood has been criticised for encouraging trading

Credit: Bloomberg

However, the app has found itself under new pressure over its role in the wild trading of shares such as GameStop and AMC in recent weeks. Robinhood limited trading in several popular stocks as it was scrambled to secure billions in collateral, and has been accused of inspiring risky trading with animations and recommendation algorithms that critics say bear more resemblance to social media apps than investment services.

Mr Gensler, a former head of the Commodity Futures Trading Commission watchdog who has recently been teaching a course on cryptocurrencies, also said he wanted to see stronger protections for investors who buy Bitcoin and other digital assets.

“Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to,” he said.