Gamification in brokerage applications: when the interface decides for you

Modern brokerage applications for retail investors increasingly look like mobile games: simplified navigation, bright colors, animation, a system of "pumping up" the level achieved by the user, "fireworks" after a transaction, integration of social network elements with a system of reactions to other people's posts. As a result, the boundary between service improvement and behavioral manipulation is thinning and sometimes disappearing altogether. And zoomers and uneducated people are "to blame" for this.

The intuitively obvious reason for this change is the global trend toward lowering the average age of retail investors. According to a joint BCG and Robinhood study conducted for the World Economic Forum, 58% of Generation Z starts learning about investing before they even go to their first job. Compare that to the 21% share during the baby boomer generation's youth.

The rapid rejuvenation of the client base is forcing brokers to change rapidly to suit the tastes of their new retail clients. Gamification is one of the most visible formats of these changes, but as in any game, this process also has its winners and losers.

Eduard Elagin, an associate professor at the University of Mississippi, studied what changed after "gaming" app updates from 17 different U.S. brokers at once: from the classic Fidelity, Vanguard, TD Ameritrade, Interactive Brokers, E*TRADE, and Merrill Edge to the newer Webull, Robinhood, SoFi, Public, M1 Finance, and others.

The author highlighted a total of 142 updates between 2018 and 2021 that both by the developers' own descriptions and by customer reviews on the App Store increased gamification.

The main conclusion of the study: trading activity increases after gamification. At the same time, the average intraday profitability of retail transactions falls, while the volatility of results increases. In terms of one "game" update the effect is small, but a chain of all 142 updates gives tangible values: on average profitability fell by 27%, volatility increased by 18%. And the total volume of transactions for retail investors increased by 22.5%. In other words, people started to trade more gambling, but worse.

For professional market participants, gamification of "retail" has only advantages. Spreads have narrowed and there are fewer situations when a crowd of retail clients buy or sell the same thing. This is good news for those who stand on the other side of the transaction from the private investor. And given the overall growth in trading volumes as a result of "gamification", it is doubly good news for market professionals.

An experiment conducted by the British Behavioural Insights Team together with the Securities Commission of the Canadian province of Ontario showed how the main elements of gamification work separately. Its participants were given $10,000 of "game" money, on which they had to trade stocks on an isolated training platform for seven weeks. Some traded without the experimenters' intervention at all, and in the appendix to the second group, typical social and game mechanisms were connected in turn: a feed of posts with opinions on the prospects of this or that security, notifications with "social norms", such as "88% of investors this year invested in green energy", a public list of leaders in terms of profitability among the experiment participants, and the function of auto-tracking other people's trades.

It turned out that the "opinion feed" increased the turnover in promoted stocks by 12% relative to the control group, the ability to follow leaders - by 18%, but the "social norms" and "leaderboard" had no significant impact on the attention to individual securities.

That is, as soon as ribbons, profiles of "gurus" and the ability to copy their trades appear in the interface, the platform, in fact, ceases to be a neutral showcase and turns into an active participant in the game, which gently but persistently "pushes" the user to certain securities.

Another experiment, conducted on almost a thousand participants from the U.S. and Britain, showed how two types of gamification work: "emotional" - congratulations and confetti on the screen when making deals, virtual badges for new achievements, and "informational" - price signals, notifications about the formation of trends.

It turns out that participants with lower financial literacy are more likely to choose platforms with entertaining elements like confetti and achievement badges. On average, such effects increase trade volume by 5%. That said, the difference in activity between "playful" and "boring" platforms is mainly due to user self-selection. Those who gravitate toward "entertainment" interfaces are more likely to trade erratically, while proponents of non-gamified platforms are more likely to go against the crowd. Finally, price movement notifications help those with correct market perceptions and perpetuate mistakes for those who are misguided.

That is, the problem is not just that apps turn an investment into a game, but that different players in that game are at different levels of difficulty, and the rules and cues within the interface encourage some to learn and others to make systematic mistakes.

The general trend towards gamification of brokerage apps has not escaped the attention of regulators. Gary Gensler expressed doubts about the appropriateness of using animation with balloons and confetti in brokerage apps back in 2021.

Robinhood, about whom the complaint was made, then responded:

"Confetti does not appear after every trade. Thus, confetti has essentially nothing to do with frequent trading."

As of today, there is no strict ban on gamification in the US: the SEC formally withdrew the draft rules on "predictive analytics and similar technologies" after three years of discussions. The topic remains a priority for supervisory inspections, but is regulated through existing regulations and compliance practices, rather than through a separate "anti-gamification" act.

The UK has gone a little further. There, there are already bans on any monetary and non-monetary incentives for "invest now" promotions of high-risk assets, as well as promotions of crypto-assets, including referral bonuses and "gifts for entry".

In Canada, the Ontario Securities Commission neatly calls some of the interface practices "dark patterns" and gives specific compliance expectations for online platforms.

The European Securities and Markets Authority considers "gaming" elements that encourage frequent transactions, risky practices and FOMO to be potentially contrary to the duty of professional participants to act in the best interests of the client. But there are no direct prohibitions either, the issue has been brought to the level of recommendations for national European jurisdictions.

On a global level, the International Organization of Securities Commissions released its final report on Digital Engagement Practices this year and it too does not impose outright bans, but it does enshrine a set of "good practices" and calls on national regulators to restrict brokers from using techniques that systemically degrade the investment experience for retail clients.

While officials continue to discuss with the industry how to better protect private investors from what is beneficial primarily to the industry itself, it is worth considering a personal line of defense against all these "pushing" techniques.

First things first. Treat visual and social elements as unnecessary triggers. Their task is to increase the number of your interactions with the application, so the best filter is to customize your working environment yourself. If possible, disable anything that distracts you from trading discipline.

Second. Remember that the practice of frequent transactions, which gamification of applications encourages you to do, rarely pays off. If you want to "play", separate a small "sandbox" from the main capital.

Third. If you feel that emotional stimuli are "clinging" to you, but the brokerage application does not allow you to remove them - consider switching to another broker.

However, you can look at this whole gamification story from another angle. Recently in social network X, Daniel Leb, a well-known American investor, was asked where it would be better to open an account for a teenager - the classic Fidelity or the trendy Robinhood.

The answer was stark: don't deprive your teen of the opportunity to have this experience.

Let him lose his money and realize the value of analysis, industry expertise and a long horizon.

This article was AI-translated and verified by a human editor