Wall Street’s top regulator is looking into whether or not there may need to be rules leveled against brokerage apps that gamify stock trading, The Wall Street Journal (WSJ) wrote on Wednesday (May 5).
Securities and Exchange Commission (SEC) Chair Gary Gensler, in testimony prepared for the House Financial Services Committee, plans to say that apps using “appealing visual graphics” to reward a user’s decision to trade could encourage frequent trading that results in worse outcomes for investors.
He plans to say that the “gamification” as trading moved to online platforms came long after most investor protection rules were written and that those online platforms have been blamed for encouraging investors to trade more.
Gensler is expected to appear Thursday (May 6) before lawmakers in a hearing that had been scheduled earlier this year as a response to the incidents in January in which several “meme stocks” like GameStop and AMC were inflated in value far above the losing bets placed on them by hedge funds, which caused damage to those funds.
He also adds that the SEC plans to study the regulatory changes in response to the March blow-up of Archegos Capital Management, leading to over $10 billion in losses for top global banks.
Overall, Gensler is looking at whether larger broker-dealers known as wholesalers have outsized power in handling retail orders. Under this system, called payment for order flow, the wholesalers pay the retail brokerage firms, including ones like Robinhood Financial LLC and TD Ameritrade, for the right to trade with those customers’ orders.
That system has long been criticized for its potential to cause conflicts of interest. For instance, it questions whether retail brokers are encouraged to maximize their profit rather than making sure customers get the best prices.
PYMNTS reported in February on regulators’ intent to look into the matter, writing that the issue with the “gamification” was that it had transformed away from financial education and experience and into an “us vs. them” experience of fighting hedge funds.