Bloomberg Law
Sept. 7, 2021, 10:01 AM

SEC ‘Gamification’ Study Ups Reporting Threat for Online Brokers

Andrew Ramonas
Andrew Ramonas
Corporate Disclosure Reporter

Online brokers offering engaging and game-like trading features in their apps face potentially heightened disclosure requirements.

The Securities and Exchange Commission, concerned that intuitive and possibly addictive trading apps may fuel more adverse trades and raise conflicts of interest, is increasing its scrutiny of companies like Robinhood Markets Inc., Webull Financial LLC, and their rivals.

The agency Aug. 27 asked for comments from the public on whether online brokers’ disclosures to retail investors are adequately explaining any efforts to influence trading. The request also sought comments on disclosures about brokers’ conflicts of interest, as they are required to act in the best interest of their customers, not their own.

“If a broker didn’t take a look at disclosures around this issue in light of these questions, that would be shortsighted,” said Paul Hastings LLP partner Nicolas Morgan, a former SEC lawyer.

Heightened disclosures could give trading app users more information about brokers’ conflicts of interest and efforts to influence unsophisticated investors, particularly those who are young. But industry watchers point out the limits of the disclosures’ effectiveness in adding guardrails to “gamification,” in which brokers deploy prompts on their apps to keep users engaged.

Robinhood has faced significant pushback from federal lawmakers who have raised concerns about potential harm to retail investors drawn to the firm’s app. The app gained fame for using digital confetti to celebrate trading firsts. But after criticism about gamification, it switched to other animations to commemorate traders’ milestones.

The app helped fuel trading in GameStop Corp. shares and other meme stocks, driving market volatility and big losses for investors earlier this year.

Targeting Young Traders

The SEC already has received hundreds of comments—ranging from concerns to kudos—from people who appear to be retail investors, ahead of an Oct. 1 deadline for feedback.

Trading apps’ game-like traits have helped make investing more accessible to young people, but could encourage them to buy and sell stock in ways that are inconsistent with their goals and risk tolerance, according to the SEC.

Studies have found that individuals who traded more benefited less from buying and selling stock, said Justin Chretien, a former Financial Industry Regulatory Authority enforcement senior director.

“Anything that encourages the customer to trade more, simply for the sake of trading more, is a problem,” said Chretien, who’s a shareholder of law firm Carlton Fields P.A.

Celebrations, Contests

The SEC’s request for comment didn’t lay out specifics for possible disclosures. But the agency is expected to use collected comments in crafting guidance to clarify existing rules, or in proposing new rules for more broker disclosures in the months ahead.

The SEC sent the request to amplify its interest in learning about the amount of information online brokers provide retail investors about their tools, methods, and objectives.

The document had dozens of questions asking how brokers use game-like features, predictive analytics, and other tools on their apps and what the firms disclose about them. The agency also queried retail investors about their experiences with digital trading celebrations, contests, badges, prize points, and other app features.

The agency might decide to require online brokers to report potential conflicts of interest that arise from their apps’ features after its review, Chretien said.

Game-like features and predictive analytics may pose a conflict of interest for a broker when they’re designed to increase revenue, collect data, or keep users engaged, Democratic SEC Chair Gary Gensler has said.

All brokers must report potential conflicts of interest and risks under regulations issued by the SEC and FINRA, which work together to police the brokerage industry. But the regulators don’t have any disclosure rules specifically designed for online brokers and their digital engagement practices.

But some disclosure changes might not be useful, Morgan said.

“If there’s a disclosure for some online broker that says, ‘Our use of confetti animation may cause you to engage in more security transactions,’ I just don’t how effective that’s going be,” he said.

Chore to Read

Robinhood already has an online disclosure library, with more than three dozen documents its customers can review.

Robinhood CEO Vladimir Tenev cited his company’s disclosures during a congressional hearing over the GameStop trading frenzy earlier this year. “Transparency is a priority” for Robinhood, he said.

Company disclosures only are useful to investors if they read them, said Amy Lynch, president of FrontLine Compliance LLC, which advises financial firms.

“No matter how good that disclosure is, it’s only good if it’s actually reviewed and understood by the customer,” said Lynch, a former SEC and FINRA official. “There’s never been a way to force a customer to read the disclosure.”

To contact the reporter on this story: Andrew Ramonas in Washington at

To contact the editors responsible for this story: Roger Yu at; Laura D. Francis at