The Gamification of Trading Apps and the Case for Regulation

The stock market headlines of late have been dominated by the newly nicknamed “too the moon” surges in the share prices of Gamestop, BlackBerry, AMC, Nokia, and Bed Bath & Beyond, amongst others. But what is behind this phenomenon and what might the implications be for the Securities and Exchange Commission (SEC) and other government regulators?

“David v Goliath”

What ostensibly started out as an attempt to “democratize” equities investments snowballed into a “David v Goliath” affair as professionals who had placed bets on a stock to fall were suddenly forced to buy the stock to cover their losses when the price rallied.

These “meme investors” using many mobile-friendly applications such as Robinhood and WallStreetBets have flocked to buy stocks that professionals such as Wall Street hedge funds were shorting, or betting against. Buyers of the stocks—typically younger retail investors using online trading platforms—have fanned their enthusiasm for their unusual positions on social media platforms such as Reddit, TikTok, YouTube, Discord, and Telegram.

Amateur Investors + Stimulus Checks + User-Friendly Apps

The founder of a large US-focused, technology biased, large capitalization, long-short equity fund, Dan Niles, qualified the new-comers as, “Traders armed with stimulus checks. They can organize more easily on things like WallStreetBets, they can work from home, and there’s no-cost trading,” he said.

By not charging an upfront fee, many online platforms are making investing more affordable and easier for everyone, and what is more, they have found a way to make it enjoyable. Many user-interfaces have a videogame feel to them, with graphically stimulating visuals and social-media-like interactions.

Lawyer Sean Burstyn, speaking at a panel discussion hosted by Thomson Reuters, argued that this kind of gamification is emotionally manipulative and might encourage reckless behavior: “There are psychologists behind all of these tools, they’re made to be addictive. It’s no different than any social media sites that we spend a little bit more time on than we want,” he said.

Meanwhile, a new battleground in the “war” is already being drawn as the Securities and Exchange Commission (SEC) prepares a report addressing the issues raised by the GameStop episode, and chairman Gary Gensler has said that there may be a need for new rules for brokerage apps that turn stock trading into a game or contest, reported the New York Times.

Paul McCurdy, also speaking at the Thomson Reuters debate, referring to the David and Goliath effect, speculated on further legislative and regulatory involvement: “It’ll be interesting to see if one of the 50 states weigh in on it and come up with whatever they are going to regulate,” he said.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.