SEC fights dangerous retail investing ‘gamification’ in new campaign

When naïve investors make rash or foolish decisions, it’s time to fight fire with fire.

It’s the new approach the SEC is taking to educate people who buy and sell risky stocks frequently or on a whim, often on apps like Robinhood Markets. The digital retail brokerage, the subject of scrutiny for its gambling appearance, offers fast and free trading on a platform full of animated graphics that critics say encourages excessive risk-taking.

In an effort to counter such “gamification”, the Wall Street regulator unveiled on June 1, a consumer education campaign whose main component is… a game show.

Sticky leisure suit
The anchor of the SEC’s digital effort is “Investomaniaa nerdy TV show hosted by a man in a peach-colored leisure suit and a fake tan. With a smile, he asks candidates to choose from nine investment options on an electronic board. Ranging from “stocks on margin” and “guaranteed returns” to “FOMO” and “tulip bulbs”, all choices are bad. Competitor ‘Brad’, who looks like a college student and has already lost $5,250, excitedly yells, ‘I’m going to take meme stocks! Invest!” A red “X” buzzer sounds, Brad immediately loses another $10,000, and a cream pie hits him in the face.

Then it’s his opponent’s turn. “I’ll do some research first,” said “Julie,” refusing to invest in any of the options. “Can we do some research? asks a distraught “Brad”. A voice intones as ‘investing is not a game’ before sending viewers back to investor.gov for research advice.

The twist in the SEC’s approach is not lost on industry experts.

“Yeah, they’re kind of doing exactly what they’re criticizing,” said Scott Smith, director of consulting relationships at Cerulli Associates. “But the end goal is different.” While Robinhood “plays to create revenue,” he added, the SEC “plays to educate consumers.”

‘Free stock!’
Robinhood has taken a hard look at whether its gamified features — some of which no longer exist — encourage inexperienced investors to make rash choices, often with complex products like cryptocurrencies and options that can lose a lot of money. At a time when posts on Twitter, TikTok and Instagram routinely dispense financial advice, investing from a social media recommendation can lead to unfortunate results.

Last August, the SEC called for comments on “digital engagement practicesin financial services, including behavioral prompts, marketing techniques, gamification features, and design elements of retailer websites, portals, and apps. In March 2021, a Senate Banking Committee audience centered on Robinhood and its role in the once explosive price of GameStopa “meme” stock that grew 25x in January 2021 after retail investors promoted the company on a Reddit page, WallStreetBets. Massachusetts regulators first accused Robinhood of “predatory practices” that made investing a game of money in 2020.

Until March 2021, Robinhood offered a digital flood of colorful confetti to encourage an investor’s first trade or referrals from friends at the brokerage. Today his website and the app have features like rewards for inviting friends and family to the app. “Choose your free stock part! Earn up to $200 in stock for every referral!” says the company, with animated Rubik’s cubes levitating above Fortune 500 company logos. “You can get up to $1,500 a year by referring friends,” it adds. A referral link sends users to Twitter.

Commission-free brokers like Robinhood, Schwab, and E*Trade are also scrutinized by the SEC for order flow payment, in which market makers pay brokers to route client orders to them rather than to exchanges. This practice can mean that a retail investor does not get the best price.

Robinhood, listed on the stock exchange, did not respond to a request for comment.

Risk, shit
Other SEC campaign videos warn of celebrity endorsements for cryptocurrencies, the pipe dream of guaranteed returns, and the danger of borrowing money from a brokerage to buy stocks, known as margin investing. It’s a message that many financial advisors heed, but sometimes struggle to get across to clients.

Jim Crider, CEO of Intentional Living FP in New Braunfels, Texas, said while game-like features that introduce people to responsible investing can potentially be helpful, they can also turn things into a casino, not into a long-term plan.

“We have seen with young investors a conversion from investment to speculation, thanks to over-gamification,” he said.

Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, said in a statement that “we continue to seek creative and memorable ways to reach and educate investors, and we hope that this year’s public service campaign, with its light-hearted approach, will catch the attention of all kinds of investors “. Investors, the statement added, “are being inundated with so-called ‘investment advice’ and we encourage investors to outsmart the chatter by doing their own research.”

The regulator is trying to push ordinary investors to investor.gov for detailed overviews of investing and finance, including fees, product types and pension plans. In the process, he is fighting back against the financial advice given on Twitter, TikTok, Instagram and other outlets. “SEC releases video mocking retail investors as game show idiots”, mocked a WallStreetBets poster. Another one wrote of the government agency, “the worst part is that your taxes paid for this content…the whole market is a stockpile of memes”.

Regulators face a battle to counter stock market cheerleading on social media.

Bloomberg News

In January 2021, as retail investors skyrocketed GameStop shares after hyping them up on social media, the SEC warned in an investor alert that “retail investors should understand that all investments involve risk and that investing for the short term in a volatile market involves significant risk of loss.”

Robinhood takes a different approach to risk. His “What is the stock market?” module says, “Myth: Investing is gambling. The truth is… it’s up to you. The stock market can be anything you want, whether it’s a place to build wealth over time or a place where you make big, risky bets.

Isn’t it ironic
Whether it’s game-like investment apps or the SEC’s game show, “the human mind is very influenced by mere sound bites, vivid and salient images, and dramatic narratives,” he said. David Hirshleifer, professor of economics at USC’s Marshall School of Business in Los Angeles. who specializes in behavioral finance.

At the same time, he added, “it’s hugely ironic” for the SEC to “use a game show format as a way to combat investor addiction to memes.” While he said it can “potentially make sense” to fight fire with fire, it “can legitimize the idea that it’s good to think casually about investments and treat it like entertainment.” . The SEC did not respond to requests for comment.

Cerulli’s Smith said amid the social media explosion, getting the attention of Main Street investors, especially younger ones, is an uphill battle. “To get any form of connection or engagement, it has to be fun or exciting,” he said. “Nobody reads the 50-page disclosures.”