The Securities and Exchange Commission is seeking public input on the digital engagement practices of online broker-dealers and investment advisors as it considers new rules that could set limits on so-called gamification techniques that critics say encourage overuse of investment apps.
“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” said SEC Chairman Gary Gensler in a press release Friday. “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.”
Online trading applications like Robinhood
and Webull have exploded in popularity in recent years, as they have lured young investors with zero-commission policies and flashy interfaces that some worry are overly seductive, causing some users to spend more time on them than is optimal for their financial health.
Robinhood was thrust into the public spotlight earlier this year after extreme volatility in so-called meme stocks like GameStop Inc.
and AMC Entertainment Holdings Inc.
led the firm and some of its competitors to temporarily prevent its customers from purchasing shares in those companies.
Public outcry over the move prompted Congress to investigate the incident while also putting a spotlight on the applications’ interfaces and techniques used to make them more appealing to use.
“Robinhood seems to have perfected the gamification of trading, providing the user with the perception that investing through the app offers recreational game playing with little or no downside risk,” said Rep. Nydia Velazquez, a Democrat from New York, during a Financial Services Committee hearing in March, summarizing some of her colleagues concerns.
In a video message Gensler posted on his Twitter account Friday afternoon, the chairman compared some of these tactics to those used by online streaming platforms to encourage customers to spend more time with their product.
“The streaming apps figured out I’m kind of a rom-com guy. I’m more likely to spend more time in a app if they suggest a rom-com than if they recommend some other movie,” Gensler said. “If we watching a movie that a streaming app recommends and I don’t like, we might lose a couple of hours of an evening. Follow the wrong prompt on a trading app, though, could have a substantial effect on a saver’s financial position.”
Many of the zero-commission trading platforms earn money through a practice called payment-for-order flow, whereby market makers pay the online broker for the privilege of executing their customer orders. Critics say this business model creates an incentive for companies to encourage its customers to place more and more trades, which some research has shown leads to poor financial performance.
“Regulators need to unpack the subliminal messages that are built into the app that cause people to unconsciously and thoughtlessly do things that they would not do if they had the space for deliberate consideration,” Dennis Kelleher, CEO of Better Markets, a nonprofit organization that argues for stricter oversight of the financial-services industry, told MarketWatch earlier this year.
Robinhood CEO Vlad Tenev pushed back on these types of accusations when he appeared before the House Financial Services Committee in February. ““Even though we have made investing easier, we recognize it is not a game,” he said. “While I am not aware of any agreed-upon definition of gamification, I do know that Robinhood designed its app to appeal to a new generation of investors who are more comfortable trading on smartphones than speaking with a broker.”
The SEC is requesting that both industry participants and retail traders submit their feedback over the next 30 days as it considers potential rulemaking in the area. In a statement Gensler said he was “particularly focused” on how the SEC can protect investors when digital engagement practices have a large “impact on platform revenues, data collection or investor behavior.”