Estimated reading time: 3 minutes, 33 seconds

SEC Chairman: Stock Trading Looking an Awful Lot Like Video Gaming

Gary Gensler, chairman of the Securities and Exchange Commission, told members of Congress he is worried that new fintech trading platforms have turned the stock market into a video game.

Gary GenslerGensler testified before the House Committee on Financial Services on Thursday, May 6, and was discussing the wild volatility that certain stocks endured in recent months. One of those stocks discussed was GameStop, which saw its price expand and contract by hundreds of dollars within weeks. However, the newly minted regulatory chair wanted to talk not just about the video game retailer, but the way the entire trading landscape has begun to turn into a game itself.

“While entities such as GameStop, Melvin Capital, Reddit, and Robinhood have garnered a significant amount of attention, the policy issues raised by this winter’s volatility go beyond those companies,” testified Gensler. “Instead, I think these events are part of a larger story about the intersection of finance and technology.”

He went on to talk about the impacts “gamification” has had on the market, and how new technologies have helped to expand access to it. While new technologies and platforms have helped make it easier for investors to join, trade, get advice and learn about how investing works, they have also come with a bevy of features like behavioral prompts, analytics and differential marketing, he added, that might have detrimental impacts on users.

“There isn’t a settled definition of gamification, but broadly, it refers to the use of game-like features—such as points, rewards, leaderboards, bonuses, and competitions—to increase customer engagement,” he said in front of the committee. “Beyond gamification, there are also behavioral prompts that encourage users to engage more with an app, much like push notifications we receive on breaking news stories.”

From Twitter:

Eric Lipton @EricLiptonNYT

"I was amazed as I looked around & saw just how many DC powerbrokers have been hired up by crypto industry. And it’s not just lobbyists. The 'shadow lobbyists' too like Teneo, which assigned a former top Treasury official to work his magic to fight SEC case"

He also pointed to other features like copy trading and social trading that encourage users to use the decisions of other people to influence their own actions. The success or failure of these activities then informs how the features evolve and how they are communicated to different “customer segments,” he said.

Gensler said, though, in other contexts these features might be benign when they help us to pick a movie, for example, and they may even be useful as we are nudged toward exercising by our fitness apps. In a financial context, though, he says the stakes are much higher.

“Following the wrong prompt on a trading app… could have a substantial effect on a saver’s financial position. A big loss could have immediate implications for the app user’s ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement,” Gensler said . “Many of these features encourage investors to trade more. Some academic studies suggest more active trading or even day trading results in lower returns for the average trader.”

Rep. Maxine Waters, chairwoman of the House Committee on Financial Services, said the SEC is going to need to play a critical role when it comes to ensuring markets are fair and transparent and investors are protected, and in that respect, they have their work cut out for them.

“Unfortunately, the previous Administration’s appointees to financial regulatory agencies were often more interested in helping out Wall Street than protecting main street,” said Waters, in a statement.

To that end, Gensler said he has directed staff to prepare a public input request with respect to these issues. This is largely due to the fact that much of the regulation on the books was penned prior to the promulgation of many of the technologies being used by investors, he said. “I think we need to evaluate our rules, and we may find that we need to freshen up our rule set. If we don’t address this now, the investing public—those saving for their futures, retirements, and education—may shoulder a burden later,” he added.

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