Better Markets filed a comment letter to the SEC in response to their request for information (RFI) on the use of digital engagement practices (DEPs) by online brokerage firms and investments advisers.
In late August, the SEC announced it would seek information and public comment on the use of DEPs by financial entities like mobile investment apps and robo-advisers to better understand current market practices and assess the need for further regulation.
DEPs came under public scrutiny in the aftermath of the frenzied trading of GameStop, AMC, and other so called “meme-stocks” in early 2021. Better Markets has been at the forefront of educating regulators, legislators, policymakers, and the media about the dangers of some DEPs, including gamification tactics, on retail investors and the stability of capital markets. On March 17, 2021, Better Markets’ Dennis Kelleher testified before the House Financial Services Committee and emphasized how trading is being gamified to increase volume and maximize profits for online trading platforms.
Why it Matters: The reality is that the some of the dominant platforms and apps are designed simply to maximize broker revenue regardless of the damage done to investors. They manipulate investors by bombarding them with constant prompts and rewards for trading, urging them to trade and often luring them into complex and risky products including options and margin accounts. Brokers can sell that retail trading volume to other firms—it’s called “payment for order flow”—and reap huge profits. This is not about democratizing finance, as some have claimed, it’s about exploiting retail investors for profit.
A distinctive feature of these platforms, and one that can be especially harmful to investors, is the “gamification” of investing. This strategy involves the design and deployment of addictive, game-like features for the purpose of triggering more trading, more often, and more thoughtlessly. As we explain in our comment letter, that type of trading actually leads to suboptimal results and disproportionately high trading losses.
What we said: While these technologies have the potential to help make trading more accessible to a younger and more diverse population of investors, they also pose serious threats. Better Markets does not support the purported “democratization” of finance that involves the use of DEPs to manipulate and exploit retail investors. We also argue that the SEC can and should apply existing rules, including Regulation “Best Interest,” to help curb the powerful conflicts of interest that drive these platforms. And we urge the SEC to consider any new rules that may be necessary to make sure that these platforms serve rather than exploit investors. As Chair Gensler has rightly said, harnessing new technologies while protecting investors means bringing those innovations within a strong regulatory framework. That’s what the SEC must now do.
Bottom Line: Better Markets commends the SEC for closely examining such engagement methods and gathering valuable information from all stakeholders as it will help the Commission better understand the uses and abuses associated with this technology and take steps to better protects investors.
Read more in our press release.