Gamify This: FINRA and the SEC’s Decision on Gamification Looms Large
BY: Michael J. Pioso, Student Editor
In early 2021, the stock market was on fire. An army of retail investors, people like you and me, had seemingly taken over. Most of these retail investors placed their trades through Robinhood, an application-based online brokerage. How did Robinhood attract 18 million active users and nearly $80 billion in assets? Robinhood attracted these traders through distinct application features, such as generous referral programs, a sleek user-interface, the option to purchase fractional shares, and a confetti explosion to celebrate each trade.
This army of retail investors produced extreme market volatility. This should not come as a shock, especially given that ordinary retail investors accounted for 23% of total US Equity trading in 2021. Regulatory bodies like FINRA and the SEC quickly noticed this volatility, as well as the horror stories that emerged of retail investors taking massive losses. The regulators specifically homed in on the platforms, not the users. The big question was whether online brokerages’ gamification features were harming retail investors.
Starting in February 2021, FINRA has increased its oversight of application-based online brokerages that maintain game-like features. The regulatory body is concerned that online brokerages are attracting young, inexperienced investors through their easy-to-use, incentive-filled platforms. At the time this Developmental Article was written, FINRA had not drafted any formal rules to address online brokerages. FINRA is expected to play a secondary role in the charge against online brokerages and gamification features and will likely follow the SEC’s lead.
The SEC has been far more aggressive in their response to online brokerages and gamification features. In late August 2021, the SEC began soliciting public commentary on the use of digital engagement practices to assist them in drafting a new rule. SEC Chair Gensler hoped that the public would answer two questions: (1) “how the financial regulator should protect investors against a potential conflict of interest”; and (2) “if brokerages’ game-like or predictive prompts assume optimal outcomes and impact how often customers trade, should the regulator consider those in-app prompts as formal investment recommendations or investment advice?”
The SEC has received considerable push-back from various securities associations, who have argued that the existing regulatory framework properly covers gamification features. U.S. Senator Pat Toomey has also argued in favor of the online brokerages, stating that the brokerages have made investing far more accessible and that adults should be free to invest their money how they see fit.
In mid-October 2021, the SEC released a 45-page report stating that gamification features “on stock-trading apps could lead investors to trade more than they would have otherwise and need to be further examined.” However, the SEC did not provide any specific regulatory recommendations or actions, punting on the issue for the time being. Over the coming months, all eyes will be on the SEC to see what kinds of regulations and protections they will enact. The one thing we do know is that whatever the SEC decides, FINRA will follow.
Sources:
Thomas Franck & Maggie Fitzgerald, SEC steps up research into brokers’ ‘gamification’ of trades, Chair Gary Gensler says, CNBC (Aug. 27, 2021), https://www.cnbc.com/2021/08/27/sec-steps-up-research-into-gamification-of-trading-with-online-brokers-gary-gensler-says.html
Hailey Konnath, SEC Says ‘Game-Like’ Trading Apps Need More Examination, LAW360 (Oct. 18, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1432171/sec-says-game-like-trading-apps-need-more-examination
Kate Rooney & Maggie Fitzgerald, Here’s how Robinhood is raking in record cash on customer trades — despite making it free, CNBC (Aug. 13, 2020), https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on-customer-trades-despite-making-it-free.html
Al Barbarino, FINRA Report Puts ‘Game-Like’ Trading Apps On Notice, LAW360 (Feb. 2, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1350865/finra-report-puts-game-like-trading-apps-on-notice
Robert W. Cook, President and Chief Exec. Officer, Financial Indus. Regul. Auth., Statement Before the Financial Services Committee U.S. House of Representatives (May 6, 2021) (transcript available at https://www.finra.org/media-center/speeches-testimony/statement-financial-services-committee-us-house-representatives#_ftnref23)
Al Barbarino, ‘Gamification’ Exposes Major Reg BI Flaw, SEC Official Says, LAW360 (Oct. 13, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1430578/-gamification-exposes-major-reg-bi-flaw-sec-official-says
Al Barbarino, Toomey, SIFMA Say No To New SEC ‘Gamification’ Regs, LAW360 (Oct. 1, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1427346/toomey-sifma-say-no-to-new-sec-gamification-regs
Annie Massa & Tracy Alloway, Robinhood’s Role in the ‘Gamification’ of Investing, Bloomberg (Dec. 19, 2020), https://www.bloomberg.com/news/articles/2020-12-19/robinhood-s-role-in-the-gamification-of-investing-quicktake