The Financial Conduct Authority (FCA), the UK's financial markets regulator, published a market warning linked to trading applications design on Monday. The investment industry watchdog is drawing attention to the 'gamification' of retail trading , which may work against investors' best interests.
According to the press releases, the FCA warned trading app providers to review their products' features and designs, especially regarding gamification elements. It may lead to overtrading and excessive risk-taking, which might far exceed the average investor's risk aversion level.
Gamification is an attempt to enhance specific services by offering experiences similar to those created by video games to engage and motivate users. However, in the case of trading apps, this involves too high risks, the FCA says.
The financial market watchdog has published today’s warning and an accessive report entitled 'Gaming Trading' showing the potential disadvantages of that strategy. The results of the survey show that extensive gamification of trading may lead to gambling-like behavior and addiction.
"Some product design features could be contributing to problematic, even gambling-like, investor behavior. We expect all firms that offer stock trading to consumers to review and, where appropriate, make improvements to their products based on these findings. They should also ensure they are providing support to their customers, particularly those in vulnerable circumstances or those showing signs of problem gambling behavior," Sarah Pritchard, the Executive Director of Markets at the FCA, said.
The FCA states that game-like elements of a particular trading app might force some traders to borrow money to invest. According to the 2022 Financial Lives Survey, 9% of UK traders have borrowed funds to trade, and 49% of them would not be able to do so without additional financing.
Confetti, Leaderboards and Push Notifications. The Three Sins of Gamification
The research undertaken for the 'Gaming Trading' report allowed the identification of the main trading app design features which may be linked to potential consumer harm. The FCA found that the use of 'positive reinforcement' after a successful trade, such as falling confetti or celebratory messages, can lead to overtrading.
Among the 'major sins' of the current design of trading applications, the FCA highlights the use of “badges, rewards and leader boards” that rank traders based on their trading achievements and the frequent push notifications that draw attention to the most important market news and price changes.
“We are also concerned that the app features may blur the lines between online investing and gambling-like behaviors, as suggested by another study. Previous FCA research has shown that for many younger, new investors, emotions such as thrill and excitement are key drivers for investing. This might be especially heightened for investing in riskier investments such as crypto assets and CFDs,” the FCA commented.
In July 2022, the Cyprus Securities and Exchange Commission (CySEC ) launched an investor protection campaign to tackle the growing international harm caused to retail traders through the use of gamification.
