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Gamification Offers Benefits, Risks to BDs and Clients: FINRA

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What You Need to Know

  • As with any tool, what makes gamification useful or not is how you use it, according to FINRA.
  • Gamification can be used to help educate investors or encourage them to make a good investment — or too many trades.
  • Brokers need to be careful about what they communicate in their social media posts, FINRA warns.

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?”

More on this topic

An investor may try to mimic another trader who was up 10% for the month but has no idea whether that other trader has a similar risk profile or whether they had success with stocks last year, Price pointed out. “If I try to copy what they’re doing” based on one small “snippet” of trading activity, “I may end up hurting myself,” he said, adding: “It may be Jeff Bezos on the other side of that trade and may be able to withstand a lot more risks than I can.”

What it comes down to, Price explained, is that “anything that really pushes” investors to make an “emotional decision rather than a rational decision is a risk.”

It is “great that it raises awareness and may open up new worlds to people that haven’t thought about investing earlier,” Price conceded. In general, it is better to start investing as early as you can in your life to provide a better financial picture as you get older, “but I think you have to keep in mind too that you can do some damage early on” also, he warned.

Platforms that encourage investors to trade more often are just “not necessarily recipes for success when you have somebody that is not very experienced or is a novice,” he added.

Workie agreed that gamification can be “detrimental” to investors. But he also warned it can be detrimental to those firms using it. “What I think is important to keep in mind as you’re using any of these tools is what type of governance process do you have around it? What kind of safeguards are being built in place so that you make sure that you’re thinking about what the overall impact would be, not just on the firm itself but also on the investors?”

In the big picture, “FINRA doesn’t want to get in the way of firms using effective or clear designs in their communications with the public,” according to Amy C. Sochard, vice president of FINRA’s Advertising Regulation Department.

“But the flip side is that there is some risk here as to the influence on investor behavior and that’s where I think we want to dive deeper and take a look” at gamification.

Be Careful With That Social Media Post

The panel also discussed the positives and risks of social media and digital communications overall.

“We’re always on the lookout for social media posts by FINRA-registered representatives,” according to John S. Sazegar, assistant director in FINRA’s Fraud Surveillance Department.

Another concern is “manipulation” of the market through social media posts, especially among high-profile people who have many followers, he said.

He concluded by making a simple suggestion to investors: “Make sure you’re taking anything you read online with a hefty grain of salt. Social media-hyped stocks can be extremely volatile and risky.”

(Photo: Adobe Stock)