The Buying and selling Sport | The Regulatory Overview
The gamification of financial trading apps should be maintained and not criticized.
Do you remember when trading on the stock market was so easy even a baby could do it? It seems that trading just got easier.
More and more individual investors are now trading on their phones through app-based trading platforms offered by Robinhood Financial and a host of other new brokers such as Webull and Public. Although Robinhood first gained prominence when it introduced the fee for trading with zero commissions – an idea that became the industry standard in late 2019 – the fintech startup has recently come under fire for driving another innovation: the “Gamification” of retail.
But what do commentators mean by gamification when they apply it to trading platforms? And how, if at all, should government officials regulate such platform design?
Gamification basically means using game-like elements in activities outside of the game. This strategy is nothing new. Many industries have been using gamification for decades to strengthen brand loyalty and promote consumption. For example, airlines have created frequent flyer awards to better appeal to consumers. Companies also use gamification for training, for example when companies offer their employees interactive online training.
Some critics warn that adding playful design elements to trading platforms turns investment into an actual game that adversely affects investor behavior for the benefit of brokers.
However, there is little consensus as to which parts of these trading platforms are really problematic. Critics have pointed to a variety of different features of trading apps that gamify investing, including:
- Use vivid colors;
- Give free shares for opening an account;
- Instant transfer of money for trading;
- Including social media style feeds;
- Awarding bonuses and hosting competitions for referrals;
- Providing a variety of lists of stocks, including stocks popular on the trading platform or stocks related to those already owned by the investor;
- Sending push notifications to app users; and
- Use of digital effects, e.g. B. the often mentioned outbreak of digital confetti.
Despite this lack of consensus – or perhaps because of it – regulators are increasingly scrutinizing digital trading platforms. Although the current SEC (Securities and Exchange Commission) audit priorities only indicate that the agency is focusing on digital apps by highlighting its compliance review plan “in relation to trading recommendations for mobile applications,” he vowed SEC Chairman Gary Gensler during his confirmation hearing, studying gamification and behavioral prompts used by investment apps. The current audit priorities of the Financial Industry Regulatory Authority (FINRA) are more explicit. FINRA identifies “digital platforms with interactive and” playful “functions” as “emerging risks for digital communication” and lists a large number of regulatory requirements that may be applicable.
Massachusetts securities regulators have gone further and filed a lawsuit against Robinhood alleging that the app’s use of gamification to encourage investors to use its trading platform is against Massachusetts law. The state’s complaint alleges that several elements of Robinhood’s trading platform – including “colorful confetti that rains after a trade is closed,” the “promise of free shares to attract new customers” and the sending of “push notifications to.” Customers to encourage interaction with the application and “- were sent to trade” – to facilitate “frequent, risky and inappropriate trading” by customers. The complaint also alleges that Robinhood’s lists of “most traded” and “most popular” securities encourage customers to purchase unsuitable securities.
Although Massachusetts Broker applies a higher standard of due diligence than federal regulators, both the Massachusetts Fiduciary Standard and the Federal Regulation’s Best Interest Standard are triggered by a broker’s trading recommendation. However, Robinhood denies making recommendations to its users. According to the existing rules, Robinhood is likely correct. Determining what qualifies as a “recommendation” depends on the facts and circumstances. However, a recommendation is generally a call to action. The more tailored the communication about a particular security is tailored to a particular customer, the more likely it is that it is a recommendation. Netflix-style prompts that notify investors that they might like a stock for buying a similar stock are the closest closest to a specific call to action. But few, if any, of the other so-called gamified items resemble recommendations from afar.
Regulators are more likely to analyze app-based trading platforms according to rules like FINRA rule 2210, which govern how brokers communicate with their customers. These rules are fairly broad and generally prohibit brokers from providing false, misleading, or otherwise unfairly presented information. However, some of the app design does not fall within typical broker communication and is unlikely to be covered by existing regulations.
Policy makers should be careful when considering introducing new regulations for the design of trading apps. Brokers are in the business of getting customers to trade stocks. It’s difficult, if not impossible, to draw the right line between good marketing and abusive practices – especially without adequate research into how app design affects investor behavior. Drawing this line is made even more difficult by the fact that, as one commentator put it, “probably the main payoff for dopamine in the game is seeing if you’ve made money.”
Investing simply – or even having fun – shouldn’t generate a reflexive call for more regulation by itself. The past year has brought a wave of new investors into the markets, nearly half of whom accessed their new accounts primarily through a mobile app. Although a number of factors are likely to play a role, including zero commission trading and the specific circumstances of the pandemic, the simple apps for mobile trading have helped attract new investors. These new investors are younger, more diverse, and have lower incomes than those who previously had trading accounts. As SEC Commissioner Hester Peirce recognized, regulators need to be “open to technological improvements that will make markets work better and encourage and equip more people to participate”.
Regulators should focus their efforts closely on limiting fraudulent behavior by brokers rather than inhibiting the modern app design that investors expect and that brokers use to compete. Some design elements may cross a line, but regulators shouldn’t import holdover views on how trading should look or feel to the investor – especially as younger investors begin to make their own investment decisions. And regulators should recognize in the affirmative that gamified elements can play a role in educating investors.
We should celebrate technological advances that have made investing easier and more attractive, rather than hindering it with regulatory requirements, managing trading interfaces and micromanaging investor behavior.
Trading babies these days may not be easy enough, but many new investors are finding it a lot easier than it was before. And that’s good for investors and markets.
Jennifer J. Schulp is Director of Financial Regulation Studies at the Center for Currency and Financial Alternatives at the Cato Institute.
This essay is part of an eleven-part series entitled Regulation In the Era of Fintech.