September 28, 2021

SEC ASKS FOR PUBLIC INPUT ON ‘GAMIFICATION’ OF TRADING PLATFORMS, CONSIDERS NEW REGULATIONS TO PROTECT INVESTORS

Can dressing up a digital trading platform like a video game lure retail investors into excessive or ill-advised trades with rewards as fleeting as a puff of virtual confetti or a simulated slot machine spitting out cartoon coins?

That’s just one of the questions the Securities and Exchange Commission is trying to answer by inviting public comment on so-called gamification, behavioral prompts, and other investor engagement practices used by online brokerages. 

The request for comment, which was announced earlier this month, is an expansion of an SEC inquiry into whether new regulations may be needed in the burgeoning field of digital trading.

“While these 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,” SEC Chair Gary Gensler said in a press release. “In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy.”

The press release accompanied a detailed 74-page report prepared by the Commission. The report posed numerous questions and listed several examples of digital engagement practices that could create conflicts of interest for brokerages and pitfalls for investors. Gensler highlighted two questions from the report in his announcement.

Many investment firms use predictive analytical tools to forecast the kinds of attractive returns investors could earn under ideal conditions without warning them about worst-case scenarios. If the firms have a profit motive to use those tools to encourage as many trades as possible, Gensler asked in the press release, should regulators consider those pop-up predictions formal recommendations or merely investment advice?

The SEC is also seeking input on what to do about the potential conflicts of interest that may arise when online brokerages add gaming features to their platforms—the kind of features that can drive some to near-compulsive behavior, according to published research.

Requests by the SEC for public comment are often made as a preamble to new regulations.

The report lists nine specific gamification tactics used on various digital platforms. In its list of questions, the Commission wondered if these tactics could cause investors to forget their better judgment and trade merely to keep playing a video game that has been superimposed over a trading platform where investors earn and lose real money.

They include:

*Games, contests and prizes. Some platforms will reward investors for trades by allowing them to play interactive casino-style games that do not reward them with actual money. The virtual games mimic slot machines, wheels of fortune, and scratch-off lottery tickets.

*Streaks. Some of the contests do include tangible prizes such as cash, free stock, or gaining access to additional trading features on the platforms. The prizes are offered to investors for completing “to-do lists” by a specified deadline. These are known as streaks. Tasks include completing a trade, adding funds to your account, referring others to the platform, or promoting the app on social media.

*Social Networking Tools. Some digital platforms allow investors to create avatars and interact with other investors, in some cases allowing them to copy the trades of investors they’ve met on the platform.

If it seems hard to believe these prizes could convince investors to trade against their own interests, consider the well-studied area of brain chemistry that attends the principles of gamification. In her 2014 Forbes article “Your Brain on Games,” Sylvia Vorhauser-Smith cites a University of Bristol study that notes people seem to be hard-wired not to win a game, but savor the act of playing for as long as they can.

“Research shows that the highest level of dopamine release is achieved when there is a 50% level of chance within a game rather than the game being solely based on the gamers’ skills,” Vorhauser-Smith wrote.

“Interestingly, the biggest spike in dopamine occurs not when we actually receive a reward, but when we anticipate receiving one. In other words, although we are satisfied when we achieve a goal, what actually motivates us is the pursuit of that goal.”

Despite the controversy, gamification is not without its defenders. Shortly before a Senate Banking hearing in March, Sen. Pat Toomey told CNBC that he didn’t see any problems with the practices.

“There’s a lot of criticism about gamification,” said Toomey, a Pennsylvania Republican. “The idea that you make the experience of investment enjoyable and easy is somehow a problem for some folks. Not for me.”

In February, CNBC reported, Vlad Tenev, CEO of Robinhood, which is known for gamification, submitted testimony to the House Financial Services Committee defending his company’s use of the investor engagement practice.

“Even though we have made investing easier,” Tenev said, “we recognize it is not a game.”

As part of the announcement, the SEC said it would collect public input on the report until Oct. 1.

 

Article by Kevin Lynch

 

SUBSCRIBE

* indicates required

 






 


COPYRIGHT © 2013-2025 ZILIAK LAW, LLC. ALL RIGHTS RESERVED. 
141 W JACKSON BLVD | SUITE 4048 | CHICAGO, IL | 60604 | 312.462.3350
^
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram