LISTEN: How to Trade Stocks Online: Has Robinhood Made Day Trading Too Irresistible?



Illustration of man making money using app

How Robinhood Made Trading Easy—and Maybe Even Too Hard to Resist

Is the app that brought zero-commission trades and a mobile-first design to millions of investors too good at what it does?

In Silicon Valley, Nir Eyal is the habits guy.

Want to understand how to get app users to come back again and again? Then Eyal is your man. A former lecturer at Stanford’s Graduate School of Business and an angel investor, he’s studied how companies such as Facebook Inc. and Twitter Inc. encourage users to spend time on their platforms. He didn’t invent the techniques, some of which were also being observed and taught by others on the Stanford campus by the 2010s. The place was a hotbed of behaviorally informed design. But Eyal summed up what he saw in a PowerPoint-friendly four-step model that showed how the smartest designers were turning their products into habits. In blog posts and articles in 2012, he called it “the desire engine.”

It was around this time Eyal says he was approached in a Palo Alto coffee shop by a young techie named Baiju Bhatt with a bold plan for a no-fee stock-trading app. He wanted to show it to Eyal.

A year later, Bhatt and his business partner, Vlad Tenev, would launch their company, Robinhood. Their app popularized the zero-commission brokerage, eventually forcing its major competitors to follow, and introduced millions of millennials and Gen Zers to the market. It’s also attracted critics, including U.S. lawmakers and a state securities regulator, who say Robinhood makes investing very real money feel too much like a game and encourages frequent trading by its novice users.

Eyal can’t say whether Robinhood followed his model—he met with the nascent startup’s team a couple of times but didn’t end up working with them—but he says he can see in the app many of the successful design features he’s identified. Robinhood Markets Inc. says the app was neither influenced by Eyal nor built on the idea of making the app habit-forming. “From the very get-go we built a simple, elegantly designed platform to remove historical barriers to investing and open financial markets to millions upon millions of people previously left behind,” a spokesperson says.

Eyal says the most engaging designs work like this: A good product has triggers that pull users in. Then it needs actions—particularly simple and easy ones—that remove friction and help users accomplish what they came to the app for. Variable rewards build anticipation and leave the consumer fulfilled yet wanting more. Getting people to commit things like time, effort, or social capital, what Eyal calls “investment,” increases the likelihood they’ll return. Repeat enough times, and a feedback loop is formed. The activity becomes a habit. This needn’t be nefarious: Eyal’s 2013 book, Hooked, published more than a year after his encounter with Bhatt, discusses an app that helps people read the Bible more often.

Other experts also see the Robinhood app exerting an unusual pull. “It’s a different technology of high stimulation and high distractibility,” says Brett Steenbarger, a professor of psychiatry and behavioral sciences at SUNY Upstate Medical University in Syracuse, N.Y. “With the traditional brokers, you haven’t had that.” Although Robinhood doesn’t charge commissions, like other brokers it makes money each time its users buy or sell a stock, based on payments from financial middlemen who execute the trades and earn profits on small differences in market prices.

Other brokerages’ apps do have features similar to Robinhood’s, and stock trading on any platform can inherently blur the lines between investing, entertainment, and gambling. The question many are now asking about Robinhood, essentially, is: Is the product just a little too good at what it does?

Robinhood’s critics focus a lot on its use of animated confetti to celebrate a user’s first trade (a feature it says it recently replaced with visual animations “that cheer on customers”). But that’s not the only thing that appears to have made the app so irresistible.

For the first-time user who downloads the app out of curiosity, Robinhood instantly begins to pull you into its world. After a less-than-five-minute sign-up process, there’s an offer to get a free single share of stock. Until recently, a digital scratch-off ticket appeared, letting you reveal which stock you won. (Robinhood says it removed the scratch off for all customers using updated versions of the app as of April 5.) It quickly gives a neophyte investor a stock to watch—a natural reason to keep paying attention to the app. Users can get notifications of the stock’s movements.

The company says its design principles are based not on encouraging trading but on accessibility and ease of use. Only about 2% of its users are pattern day traders, it’s noted, a label that includes any account that carries out four or more trades in five days.

The app does have simplicity nailed. Every page it shows users is less cluttered than those on many older brokers' apps. Transferring money to your Robinhood account to start trading is a breeze: Unlike the TD Ameritrade app, for example, it doesn’t make you decide if you want a normal individual account, a Roth IRA, or perhaps one for “joint tenants.” Robinhood keeps things so basic it doesn’t offer individual retirement accounts at all. “In a time when there’s market volatility and a user who’s never invested before wants to participate, they are going to go to Robinhood because it’s the path of least resistance,” says Robert Le, a senior fintech analyst at research firm PitchBook.

Actions on the app are intuitive. It takes just a handful of taps and swipes to buy stocks, and the buttons are bright and obvious. Robinhood was also early in removing a longtime obstacle to investing: unwieldy individual share prices. Instead of requiring you to wait until you have enough saved to purchase, say, a $3,399 share of Inc., Robinhood lets you buy fractions of a stock. Just tap $10 or $100 worth. And of course, there’s no commission taken off the top. (Both these features are now standard at many brokers.) As Robinhood touts, the user can get started trading with as little as $1.

Taylan Pince says perhaps Robinhood’s greatest feature is its ability to direct people seamlessly to the information it wants them to see. The chief executive officer of app developer Hipo Labs started working with Robinhood in 2014 and was immediately impressed by Bhatt and Tenev’s vision. The co-founders knew exactly what they wanted from the start, Pince says—a spartan interface with just a handful of numbers and graphs.

A hierarchy of data, with font sizes key to conveying what users should focus on, was critical, he recalls. For stock prices, the size they settled on was so big, Pince almost wondered if it looked amateurish. It didn’t. Within six months of launching, Robinhood won an Apple Design Award, the first fintech company to receive one. “There are a lot of inherent problems with stock trading, but I don’t think making products harder to use is the solution,” Pince says.

Just as important as how it looks is how the app makes users feel. Some of Robinhood’s earliest employees would go to coffee shops at Stanford, show mock-ups or early prototypes to college students, and gauge how they reacted, according to a former employee as well as Bhatt in an interview with the news site Marker. They’d make tweaks based on the responses.

Pince and his team developed animations for the live stock ticker and share-price charts, which flash green and red in real time. The visual cues made Robinhood come alive, Pince says, especially compared with its competitors.

“There are a lot of these delightful graphical moments where it’s just reflective of almost an artist signing their work,” Tenev told Bloomberg TV in March. “I think it’s reflective of us really caring about the product and trying to make our customers happy. That’s ultimately what drives product-building at Robinhood.”

Decisions such as which colors to use and how to organize information can have a dramatic impact on user reactions, says Dan Egan, vice president of behavioral finance and investing at Betterment, a rival financial app whose business model is based on portfolio management fees rather than revenue from trading. Similar to many other financial apps—as well as the Bloomberg Terminal used by professional traders—the company once had color-coded returns displayed on a summary page when a user logged in. When it scrapped that layout, customer emails asking about performance decreased, Egan says. “Color emotively amplifies people’s reactions to the same numbers,” he says. It’s “keeping somebody’s attention so that, in this case, they actually trade more.”

A letter from Robinhood to Bloomberg News says the app does not fit with Eyal’s idea of variable rewards that spur focus and engagement. Unlike, say, Pinterest, the app has a predictable appearance when opened and doesn’t push media content that’s tailored to users to keep them engaged, it says.

With a stock-trading app, of course, variable rewards are built into the product, through the market’s constant movements. Unlike some brokers, Robinhood isn’t a financial supermarket that’s also pushing slower-moving fare such as mutual funds, bonds, and college and retirement plans. It’s not difficult to buy broadly diversified exchange-traded index funds on Robinhood, but for a new user the app’s homepage focuses attention on individual stocks and cryptocurrencies. As on some but not all rival broker apps, stock and Bitcoin prices pop out visually because they’re updated by the moment. There’s also a big button on each trading page offering the choice to use options, a way to magnify possible gains and losses on stock bets. “Unlock More Potential,” the app says to users on the options sign-up page.

Beyond the thrill of hitting the jackpot, one of the most powerful things that can keep users coming back is social recognition. Another brokerage app called Webull, for example, has a Twitter-like feed. Robinhood has no such social features—there’s no button that lets you share trades with others.

But in what may be a stroke of good fortune for the company, a subculture of traders who eagerly share phone screenshots of their wins and losses has sprung up on online forums such as Reddit’s WallStreetBets. Robinhood also encourages users to sign up friends with offers of more free stock.

The app itself does have a prominent “100 most popular” stocks page, tracking those that are favored by Robinhood users, which constantly reminds you that you’re part of a larger ecosystem of users. Other brokers have popular stock lists, but at some, such as Fidelity, they’re less prominent.

Robinhood’s trading interface (right) is cleaner and bolder than rivals such as Fidelity.
▲ Robinhood’s trading interface (right) is cleaner and bolder than rivals such as Fidelity.

More so than with a video game or a social media site, getting emotionally “invested” comes naturally with an app that’s literally about investing. Over time, users can build more complex portfolios, build up gains, and, of course, also suffer painful losses.

Can a stock-trading app really be criticized for making trading compelling? Representative Cindy Axne does just that. The Iowa Democrat was one of a number of lawmakers to grill Tenev during the House Financial Services Committee hearing in February over the wild trading of GameStop Corp. shares, which many Robinhood users participated in. Axne, who ran a digital media company before getting elected, is particularly critical of the 100 most popular stocks feature. She says in an interview that there’s nothing wrong with easy investing but that Robinhood should think about where it directs attention. “No investment broker worth their salt would say, ‘Look at the popular stocks, here’s what you should invest in,’ ” Axne says. “If Robinhood was really in this for the right reasons, instead of a free stock they’d give them an ETF upfront and talk about the importance of diversification.” The company says the popular stocks lists aren’t recommendations.

On April 15, Massachusetts Secretary of the Commonwealth William Galvin filed an administrative complaint seeking to revoke Robinhood’s broker license in the state. Galvin, who’s also the state’s securities watchdog, says Robinhood uses aggressive tactics to attract inexperienced investors and encourages “continuous and repetitive use” of the app with gamelike features and phone notifications. Like Axne, he calls out the popular stocks list.

Galvin says Robinhood has violated state rules that require it to put users’ financial interests ahead of its own. He also alleges that, despite Robinhood’s slick interface, the company hasn’t done enough to avoid and respond to behind-the-scenes outages that may prevent users from accessing their accounts or trading. Robinhood disputes Galvin’s allegations and is suing to block the state, saying it’s exceeded its legal authority. “We don’t believe our customers are naive as the Massachusetts Securities Division paints them to be,” it says in a statement on its website.

Robinhood says what it’s doing is democratizing the markets. In a recent post on the company’s blog, head of design Rich Bessel compared Robinhood with older brokerages: “Everything about these companies reeked of a system designed for the 1%, with complicated, confusing and often intimidating user interfaces.” But to its critics, Robinhood looks like a step backward for a different kind of financial democratization that was under way before the app exploded onto the scene.

Index funds had pushed the cost of getting into the market and building a diversified portfolio closer and closer to zero. Small investors could buy one and then sit back and outperform the majority of professional money managers. After all, study after study has shown that even the savviest investors have trouble beating the market for long. Then Robinhood came along and brought stockpicking to an even wider audience—in part by making trading cheap and in part by making it fun.

For Eyal, watching Robinhood’s rise from obscurity to one of the most hotly anticipated initial public offerings of 2021 has part of him regretting he didn’t become an early investor. He would’ve made a huge score. But Eyal says he’s happy he remained on the sidelines. In recent years he’s become more preoccupied with the negative impact that habit-forming technologies can have on users and how people can retake control. In 2019 he published the book Indistractable, about how people can better manage their own tech usage.

“Companies making their products more engaging isn’t necessarily a problem—it’s progress. But there’s also a dark side,” Eyal wrote in that book’s opening paragraphs. “For many people, these distractions can get out of hand, leaving us with a feeling that our decisions are not our own.” Robinhood says its product is in fact built to make it easier for people to take control of their finances. But for a generation of new investors, its design has helped shape what their financial choices look like from inside a 6-inch screen.

(Updates 10th paragraph with Robinhood’s removal of the scratch-off feature in the latest versions of its app.)

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