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The Securities and Exchange Commission is seeking public input 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 overuse of investment applications.
“While new technologies may give us greater access and choice of products, they also raise the question of whether we, the investors, are properly protected when we trade and obtain financial advice,” said Friday. SEC Chairman Gary Gensler in a press release. “In many cases, these characteristics can cause investors to trade more often, to invest in different products or to change their investment strategy.”
Online trading applications like Robinhood HOOD,
and Webull have exploded in popularity in recent years, as they have lured young investors with commission-free policies and flashy interfaces that some fear are too alluring, forcing some users to spend more time than they need. optimal for their financial health.
Robinhood was put in the spotlight earlier this year after extreme volatility in so-called memes stocks like GameStop Inc. GME,
and AMC Entertainment Holdings Inc. AMC,
leads the company and some of its competitors to temporarily prevent its clients from buying shares in these companies.
Public outcry over the move prompted Congress to investigate the incident while shedding light on the interfaces and techniques of the applications being used to make them more attractive to use.
“Robinhood appears to have perfected the gamification of trading, giving the user the perception that investing through the app provides recreational play with little to no downside risk,” said Representative Nydia Velazquez, a Democrat from New York. , at a conference on financial services. commission hearing in March, summarizing some of the concerns of his colleagues.
In a Gensler video message job On his Twitter account on Friday afternoon, the president compared some of these 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 romantic comedy guy. I’m more likely to spend more time in an app if they suggest a romantic comedy than if they recommend another movie, ”Gensler said. “If we watch a movie recommended by a streaming app and I don’t like it, we could waste a few hours of an evening. Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position.
Many commission-free trading platforms make money through a practice called pay-to-order flow, where market makers pay the online broker for the privilege of executing their clients’ orders. Critics say this business model prompts companies to encourage their customers to do more and more transactions, which some research shows leads to poor financial performance.
“Regulators need to unbox the in-app subliminal messages that cause people to subconsciously and mindlessly do things they wouldn’t do if they had the space for deliberate consideration,” Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tighter oversight of the financial services industry, said MarketWatch earlier this year.
Robinhood CEO Vlad Tenev brushed aside such accusations when he appeared before the House financial services committee in February. “Even though we’ve made it easier to invest, we recognize it’s not a game,” he said. “While I don’t know of any agreed-upon definition of gamification, I do know that Robinhood has 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 asking industry participants and retail traders to submit comments within the next 30 days as it considers the development of potential rules in the region. In a statement, Gensler said it 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 “.
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