Online trading

SEC wants comment on new rules governing ‘gamification’ in online trading apps

The Securities and Exchange Commission is seeking public comment on the digital engagement practices of online brokers and investment advisers as it considers new rules that could set limits on so-called gamification techniques that critics say encourage the overuse of investment apps.

“While new technologies may give us greater access and choice of products, they also raise questions about whether we as investors are adequately protected when trading and obtaining financial advice,” SEC Chairman Gary Gensler said in a press release Friday. “In many cases, these characteristics may encourage investors to trade more often, invest in different products, or change their investment strategy.”

Online trading apps like Robinhood HOOD,
+0.93%
and Webull have exploded in popularity in recent years as they have attracted young investors with zero-commission policies and flashy interfaces that some fear are too alluring, forcing some users to spend more time on them than they need. is optimal for their financial health.

Robinhood was thrust into the public spotlight earlier this year after extreme volatility from so-called meme stocks like GameStop Inc. GME,
-0.81%
and AMC Entertainment Holdings Inc. AMC,
-3.57%
leads the company and some of its competitors to temporarily prevent its customers from buying shares in these companies.

The outcry over the move prompted Congress to investigate the incident while shedding light on the apps’ interfaces and techniques used to make them more appealing to use.

“Robinhood appears to have perfected the gamification of trading, giving the user the perception that in-app investing offers recreational play with little or no downside risk,” said Rep. Nydia Velazquez, Democrat of New York, at a financial services conference. Committee hearing in March, summarizing some of his colleagues’ concerns.

In a Gensler video message job On his Twitter account on Friday afternoon, the president compared some of those tactics to those used by online streaming platforms to get customers to spend more time with their product.

“Streaming apps have figured out that I’m kind of a rom-com. I’m more likely to spend more time in an app if it suggests a romantic comedy than if it recommends another movie,” Gensler said. we watch a movie recommended by a streaming application and that I don’t like, we risk losing a few hours each evening. Following the wrong prompt on a trading app, however, could have a substantial effect on an investor’s financial situation.

Many commission-free trading platforms make money through a practice called pay-per-order flow, whereby market makers pay the online broker for the privilege of executing their clients’ orders. Critics say this business model tricks companies into encouraging their customers to place more and more trades, which some research has found leads to poor financial performance.

“Regulators need to unpack the in-app subliminal messages that cause people to unconsciously and mindlessly do things they wouldn’t do if they had the space for deliberate thought,” Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for stricter oversight of the financial services industry, told MarketWatch earlier this year.

Robinhood CEO Vlad Tenev pushed back against those kinds of accusations when he appeared before the House Financial Services Committee in February. “‘Even though we’ve made it easy to invest, we recognize it’s not a game,’ he said. “While I’m not aware of any agreed 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 talking with a broker.”

The SEC is asking industry participants and retail traders to submit their comments within the next 30 days as it considers potential regulation 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 “significant impact on platform revenue, data collection or investor behavior”.