Games are fun. But, the cocktail of gaming and financial services can be dangerous. These two are contrasting phenomena and can be very risky.
“Gamification techniques add games or game-like competitive elements to non-game contexts such as financial services.” That's how the European Securities and Markets Authority (ESMA) defines gamification.
The regulator is particularly concerned about the implementation of such methods in finance.
Gamification of Trading
Computers, especially mobile phones, and high-speed internet have changed the retail investing space. Now anyone can open a brokerage account and trade stocks or other financial assets in merely minutes. No knowledge of the financial market is necessary.
This retail trading scheme received a boost when some trading platforms brought game-like features on their platforms. The frontrunner was Robinhood which made picking stocks like the scratching of a fun lottery and even puts celebratory confetti drops on the phone screen after investments.
The strategy proved to be a massive hit as Robinhood has become synonymous with retail trading for inexperienced newbie investors. In addition, the platform was at the center of the Gamestop short-squeeze frenzy in early 2021 that was surprisingly coordinated on a subreddit by amateur investors.
The surge in retail demand garnered millions of users for the platform, from half a million in 2014 to 22.8 million as of March 2022. The company even went public with a massive outcry on a US stock exchange.
SEC in Action
But, the practices of the so-called gamification of trading were not hidden from the US regulators. The Securities and Exchange Commission (SEC) initiated a formal probe last year on platforms implementing a game-like trading environment.
“While 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’s Chair, Gary Gensler said. His concerns were that these trading platforms encourage inventors “to trade more often, invest in different products or change their investment strategy.”
The SEC even collected public input on the 'gamification of trading', but said in a consecutive report that these platforms need further investigation.
But, the SEC is not alone to worry about the rise of the Robinhood-like trading platforms. The age-old industry players also take note of it and are often more critical of the practices.
“At the recent Berkshire Hathaway annual meeting, Warren Buffett said Robinhood has ‘become a very significant part of the casino aspect, the casino group, that has joined into the stock market in the last year or year and a half’,” Robert Johnson, the Chairman and CEO at Economic Index Associates, pointed out to Finance Magnates.
Robinhood is already witnessing a drop in demand from its user base. The pandemic-related frenzy is wearing off from the retail trading market and so is the volatility . The revenue of the platform drastically dropped from its early 2021 peaks. Its Q1 of 2022 revenue came in at $299 million, which is almost a 43 percent yearly decline.
The platform is now focusing on crypto trading and even acquired a UK crypto-startup recently.
Johnson further said: “Many of these millennial investors started participating in the financial markets because they were provided pandemic payments and were locked down during the pandemic and turned to trading stocks and crypto for entertainment. These apps actually compete with gaming apps such as Draft Kings for consumer mindshare. As markets rose in value, these individuals concluded that there was easy money to be made in these markets and participated at higher and higher levels.”
Many inexperienced retail investors believe that Robinhood democratized trading by significantly lowering the entry barrier, but Johnson believes that the platform has 'democratized speculation'.
Europe Is Strict
While the American regulator did not conclusively make any statement on the gamification of trading, its European counterpart is poised to bring curbs on such practices.
ESMA issued a clear advisory to the European Commission asking for curbs on the gamification of trading. It came as a larger effort of the regulator to further strengthen investor protection.
“Gamification techniques in trading apps and personal recommendations on social media may cause retail investors to engage in trading behavior without understanding the risks involved,” ESMA’s Chair, Verena Ross said.
However, the regulator did not detail how it wants the implementation of curbs on these platforms. Whether these platforms will have to display a compulsory risk warning or have to bring design changes, only time will tell.
Kalkine’s CEO, Kunal Sawhney thinks that the regulatory intervention in the area “will be a long-drawn battle as it can’t be restrained overnight. The proliferation is much wider to rein in the already rampant ‘gamification of trading’ phenomenon.”
“If the curbs come into effect, many gullible investors would be saved from inadequate disclaimers and disclosers influencing them into making wrong investments,” he added.
“These apps highlight trending stocks and often compel investors to buy under duress. So, curbing this trend will save money for investors. The lottery incentives run by these apps also muddle people’s minds and they fall into these traps more often. So, curbs will safeguard the investors who are already neck-deep into the ‘gamification of trading’.”
Whatever might be the regulatory discourse, any curbs on the 'gamification of trading' will definitely heighten investor protection. After all, investment is not a game or even gambling.
