SEC Chair, Investor Advocates Sharpen Criticism of ‘Gamification’ in Online Trading
Securities and Exchange Commission Chair Gary Gensler continued to turn up the heat on trading apps and robo-advising platforms and on Thursday doubled down on skepticism he has previously voiced about the gamification and some of their digital engagement tactics.
Without mentioning any providers by name, he said that platforms’ gamification strategies “are often designed, at least in part, to increase platform revenue or increased platform data collection and customer engagement” and “could lead to potential conflicts,” Gensler said.
Investor advocates on the committee, which was established as part of the Dodd-Frank Act and makes recommendations to the SEC on regulatory priorities regarding retail investors, upped the pressure for some self-directed trading platforms to be brought under the same microscope as investment advisors and brokers.
The platforms are making “recommendations” to investors and therefore should be obligated under the SEC’s Regulation Best Interest rule, which requires brokerages to act in the best interest of the investor, said Stephen Hall, the legal director and securities specialist for the nonprofit investor advocacy organization Better Markets.
If Reg BI was “brought to bear” on the self-directed platforms it would “mitigate conflicts of interest,” Hall said. He specifically called out popular trading app Robinhood Financial as an example where customers could be “manipulated” into investing by prompts. He cited features on Robinhood and its self-directed rivals, including brightly colored animations, contests, leaderboards and digital nudges.
“These platforms are not primarily about ‘democratizing’ finance, as the president, president of Robinhood likes to say,” Hall said. “They’re about maximizing profit.”
A spokesperson for Robinhood, which also faces pressure over payment for order flow, did not immediately return a request for comment. Robinhood in March eliminated a controversial confetti feature on its trading app, which had appeared on users’ screens to celebrate trading milestones.
But under the existing conditions, the platforms’ gamification features are designed “to bombard investors with manipulative signals that entice or even pressure them into trading as much as possible regardless of how it might affect their financial health,” Hall said,
He also noted that Robinhood’s app features had been deemed “toxic” by Massachusetts’ state regulators, who filed administrative charges accusing Robinhood of manipulating inexperienced investors and driving trading through the application’s design and notifications—allegations the company has denied.
In her remarks, SEC Commissioner Hester Peirce, who was appointed by former President Donald Trump, pushed back against the calls for more regulation of self-directed platforms. She raised concerns that putting guardrails around online trading platforms could limit investor opportunity to try new products, services “experiment and learn from investment successes and failures.”
“When confronted with new technologies, new products, and new ways of doing things, the regulator’s tendency is to say no instead of yes, to say stop instead of go, to see danger instead of possibility,” Peirce said. “The regulatory process underrates investor opportunity, and investors lose out.”
Peirce issued a rallying cry that the risk takers among the Robinhood users will likely embrace.
“Investors at times may be willing to take on more risk than the regulator thinks is prudent.” Peirce told the self-directed gamification skeptics. “A healthy regulatory response would resist the urge to override investor decisions and instead engage and educate investors using the same technologies through which they are investing.”
In late August, the SEC requested public comment on “matters related to the use of digital engagement practices by broker-dealers and investment advisers” and specifically identified “gamification” as an issue about which it sought to hear ideas.
Daniel P. Egan, the director of behavioral finance and investing at robo advisor Betterment, who was also on the panel, sought to distance his company from the trading apps, noting that as a registered investment advisory firm, rather than a broker,
Betterment already had fiduciary obligations to its fee-based platform users.
“We earn more money when our clients save and grow their money,” Egan said, noting that its features, as result, encouraged long-term wealth planning, rather than frequent trading.