Gamification techniques that are increasingly being used by Robinhood and other online trading platforms offers broker-dealers and their clients various benefits, but present risks to them as well, according to the Financial Industry Regulatory Authority.
Concerns about gamification took center stage last year, when William F. Galvin, Massachusetts' top securities regulator, accused Robinhood of violating state law by using overly "aggressive tactics to attract new, often inexperienced, investors" and "gamification to encourage and entice continuous and repetitive use" of its mobile application.
(On Thursday, a judge in Massachusetts denied Robinhood's request to stop the state's administrative case against it.)
During a panel session at last week's online FINRA Annual Conference, Haimera Workie, head of financial innovation and senior director responsible for leading FINRA's Office of Financial Innovation, pointed out: "Gamification is a tool. And, as with any other tools, what makes it useful or not is really in how you use it."
Gamification Benefits
Gamification techniques, which include rewards and leaderboards, can be used by BDs to "do things like educate investors," Workie explained. "This is something that's actively being done within the industry today to give people a way to approach kind of the information gap that may exist within the investment community in a way that's kind of more salient, more clear, [and] in a way that's more fun so people are more likely to learn more about investing."
Gamification techniques can also be used to encourage people to save or invest their money and can be done in such a way that it serves to "demystify" investing and make it easier to understand before clients "start the investing journey," he said.
Once people have started investing, gamification can also be used on BDs' platforms to "give them prompts or other things to help them [and] nudge them along to try to make these decisions that are in their interest," he noted.
For example, during a down market, some investors "may be inclined to sell their stocks even though they're very long-term investors and, as we know, stocks tend to be cyclical and they tend to go up and down," he pointed out. "If you sell kind of when the market is down, that could have potential implications more long term," so gamification can be used to remind investors they have a long-term strategy they may want to continue with, he said.
Gamification Risks
"Haime makes a lot of good points about some of the benefits of gamification," according to Steven Price, a senior vice president at FINRA who oversees its National Cause Program that was created in 2020 to consolidate the intake and investigation of matters based on triggering events or regulatory intelligence across the U.S.
"I agree that it can certainly be used for the positive," Price said of gamification use by BDs.
However, Price was quick to add: "I think the danger here is that investors may be making decisions that are contrary to their own financial goals."
For example, "if I'm sitting on a Peloton and I see a leaderboard and I'm clicking up the leaderboard, I may peddle a little harder to try to move up to the next spot," Price explained.
"But if people are experiencing the same types of incentive when they're trading, they may not be looking at their own financial picture quite as closely," Price warned. "For example, if I see that I'm performing in a certain way compared to other traders, am I going to trade more frequently or am I going to see someone else's performance and try to copy-trade them, which is another feature that we've seen?"
