SEC aims to stop Wall Street from playing games with America’s financial future

The Securities and Exchange Commission (SEC) is stepping up a probe into so-called gamification and behavioral prompts used by online brokerages that encourage trading.

The commission is requesting information and public comment on matters related to the use of digital engagement practices by broker-dealers and investment advisers. In particular, the SEC is asking individual investors what they think about online trading or investment platforms such as websites and mobile applications.

These tools include behavioral prompts, differential marketing, game-like features–commonly referred to as gamification–and other features designed to engage with retail investors on digital platforms such as websites, portals, and applications.

SEC Chair Gary Gensler

The also include analytical and technological tools and methods collectively called digital engagement practices (DEPs).

The initiative was partly sparked by January’s meme stock saga and game-like prompts designed to optimize customer engagement.

A few weeks into 2021, the share price of a flagging brick-and-mortar video game chain exploded, creating the wildest stock market story in years.

The GameStop saga was described as a David-and-Goliath battle in which an army of Reddit-posting populists put a squeeze on some greedy hedge funds that were hoping to profit off a short sale of the stock, before the coordinated actions helped push what had been a $5 stock as high as $483.

The company’s stock price skyrocketed cratered, and then it rose again, and has now found a new normal between $150 and $300 that has held for the past half-year.

Movie theater chain AMC’s stock got a similar treatment around the same time, going from around $3 to $20 and then soaring briefly into the $70 range in early June.

“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” said SEC Chair Gary Gensler.

“In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy,” said Gensler. “Predictive analytics and other DEPs often are designed with an optimization function to increase revenues, data collection, or customer time spent on the platform. This may lead to conflicts between the platform and investors. I’m interested in the varied questions included in the Request for Comment, and I’m particularly focused on how we protect investors engaging with technologies that use DEPs.”

The commission is issuing the request, in part, to develop a better understanding of the market practices associated with firms’ use of DEPs and the related analytical and technological tools and methods.

The SEC also is hoping to learn what conflicts of interest may arise from optimization practices and whether those optimization practices affect the determination of whether DEPs are making a recommendation or providing investment advice.

The request also is intended to provide a forum for market participants, including investors, and other interested parties to share their perspectives on the use of DEPs and the related tools and methods. This includes potential benefits that DEPs provide to retail investors, as well as potential investor protection concerns.

The request will facilitate the SEC’s assessment of existing regulations and consideration of whether regulatory action may be needed to further the Commission’s mission.

The public comment period will remain open for 30 days following publication of the Request in the Federal Register.

The SEC encourages retail investors to comment on their experiences by submitting a Feedback Flyer, available here:

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