【the hand of midas】Robinhood hit with subpoena in Massachusetts over betting markets

The probe, initiated by Secretary of the Commonwealth Bill Galvin, centres on whether Robinhood’s new platform constitutes an inappropriate form of online gambling, especially when tied to brokerage accounts used by retail investors including younger users.

On 20 March, per a Reutersexclusive, Galvin’s office issued a subpoena to Robinhood requesting documents and internal communications concerning the launch of the prediction markets hub.

Specifically, the Massachusetts Securities Division is seeking information on how many Massachusetts residents have accessed or attempted to access college sports betting through the platform.

The deadline for Robinhood to respond to the subpoena is 3 April.

Robinhood introduced the prediction markets feature on 17 March. The tool enables users to purchase financial contracts based on the outcome of various real-world events, ranging from Federal Reserve decisions to sporting events such as NCAA basketball games.

These contracts are similar in structure to wagers, offering users payouts based on the accuracy of their predictions.

The contracts offered on Robinhood are facilitated by Kalshi, a US-based prediction market exchange registered with and regulated by the Commodity Futures Trading Commission (CFTC).

Kalshi has been at the forefront of efforts to bring prediction markets into the mainstream financial ecosystem, previously attracting regulatory and public scrutiny for offering contracts based on political outcomes, including US presidential elections.

Kalshi’s partnership with Robinhood marks the first time these types of prediction-based contracts have been offered nationwide, across all 50 US states.

March Madness prediction markets generate millions

According to data from Kalshi, nearly $195m in contracts were purchased on men’s NCAA tournament games through the platform by Monday afternoon, following the first two rounds of the tournament.

Additionally, $12.8m in contracts were placed on women’s tournament games.

The influx of user participation and volume has reignited broader legal and regulatory concerns. Critics, including Galvin, argue that the offering blurs the line between investing and gambling.

Galvin has raised particular concern over Robinhood’s approach, suggesting that the company is leveraging popular sporting events, especially those that attract younger demographics, to draw in users under the guise of investment activity.

In a statement, Galvin called the feature a “gimmick,” accusing Robinhood of prioritising user engagement over responsible financial behaviour.

He expressed concern that tying what is effectively a betting mechanism to a brokerage account misleads users about the nature of the financial products they are engaging with.

This is not the first time Robinhood has drawn scrutiny from Galvin’s office. In January last year, the company agreed to pay $7.5m to settle previous enforcement actions stemming from complaints in 2020 and 2021.

Those complaints addressed Robinhood’s business practices, including its use of gamified features that critics said encouraged excessive and risky trading.

In response to the latest investigation, Robinhood has defended its prediction market offerings. A spokesperson told Reutersthat the event contracts are legal and regulated by the CFTC, and that they are offered through CFTC-registered entities.

The company emphasised that prediction markets are gaining relevance among both retail and institutional investors, and that Robinhood aims to make them accessible in a compliant and secure manner.

Debate not over yet

The issue of prediction markets has attracted increasing attention in recent years, as the boundaries between trading, gambling, and forecasting continue to overlap.

In October of last year, a federal appeals court in Washington DC ruled in favour of Kalshi’s ability to offer election-related betting markets.

The decision marked a pivotal moment in legitimising political event contracts as regulated financial instruments, despite opposition from government watchdogs.

Robinhood’s current initiative follows an earlier decision to abandon a similar effort in February.

The company had planned to allow users to place contracts on the outcome of the Super Bowl but shelved those plans after the CFTC raised concerns about the legality of the offering.