“Gamified” Trading Platforms Under Heavy Scrutiny

Online commission-free stock trading, with low or no minimums, has surged during the pandemic, and regulators and critics are coming down hard on what some call the “gamification” of trading. An article in Mother Jones begins with the case of a college sophomore with $1,600 in his Robinhood account who received a notification that he interpreted to mean he needed to come up with $178,000 to cover an options trade. His family has filed a wrongful death lawsuit. Although Robinhood takes no direct client commission, it does profit from what’s known as a PFOF, or “payment for order flow,” which is a function of trading frequency. This is the firm’s largest source of revenue, and it points to “a key lesson of the digital age,” according to the article. “If something is free, then you’re not the customer—you’re the product being sold.”

In Massachusetts, regulators sued Robinhood in December of 20, alleging it violated the state’s fiduciary duty standard and accusing it of employing aggressive “gamification” strategies, designed to attract inexperienced investors. In April the state filed a motion to amend the complaint to request that Robinhood’s license to trade in Massachusetts be revoked, prompting an online reply from Robinhood. It called the Massachusetts action “elitist” and said it reflects the outmoded notion that “new, younger, and more diverse investors don’t have a place in the markets.”

Following the April Massachusetts filing, Robinhood filed a countersuit challenging the state’s fiduciary standard of care rule. An article in MarketWatch quotes a regulatory compliance attorney who opines that Robinhood will not succeed in overturning the state’s fiduciary rule, but that it may be successful in arguing the rule doesn’t apply to its operation.

The online trading model, now with millions of users, has many defenders, among them Jennifer J. Schulp, Director of Financial Regulation Studies at the Cato Institute’s Center for Monetary and Financial Alternatives. “We should celebrate technological advances that have made investing simpler and more attractive,” she writes, “not hamper them with regulatory requirements that micromanage trading interfaces and investor behavior.”

An extensive look at Robinhood appears in a recent New Yorker. That article quotes the CEO of a competitor who credits the company for dramatically lowering the cost of investing and making investing accessible to a large previously excluded population. But he also suggests the company’s business model, with its revenue a function of trading volume, puts the interests of Robinhood and its users in conflict. The company is more “financial entertainment than investment management or wealth building,” he says. “What they’ve created is an incredibly fun, exciting, legal casino in your pocket.” The article also cites an NYU professor, author of “Addiction by Design: Machine Gambling in Las Vegas,” who finds the design of the Robinhood app incorporates many of the design features of slot machines.