Abstract

Popular zero-commission stock trading apps like Robinhood innovate in user-experience design, featuring “gamification” practices—flashy graphics, leaderboards, and the like—that make it attractive, easy, and fun to trade stocks. Regulators are increasingly scrutinizing gamification and other digital engagement practices, with efforts underway at the SEC to adopt rules in broker-dealer and investment-advisor regulation. This attention reflects considerable skepticism about gamification in securities markets. At best, these practices encourage motivation and engagement, and democratize access to financial markets. But at worst, these practices encourage people to trade habitually and unreflectively, and more than they might want. This can lead to undesirable market-wide effects, like distorting the process by which markets allocate investment capital to firms and projects that will grow the real economy, as well as socially wasteful (and individually harmful) excessive trading. And given that interventions in retail investor choice have significant implications for market quality and wealth inequality, regulatory responses here are a high stakes matter for society broadly.

Calls to regulate gamification highlight a tension at the core of securities markets. Securities law has largely ceded the field of market structure to the interests of sophisticated financial intermediaries in producing liquidity and price discovery. By permitting gamification practices that encourage active trading for the primary benefit of financial intermediaries, securities law subordinates its investor protection function to encourage wasteful investment in achieving eversmaller improvements in liquidity and price discovery. Regulatory intervention would be socially desirable, I argue, not just given what we know about retail trader behavior and its effects on personal finance and markets—but because it is an opportunity for securities law to recalibrate away from an all-out arms race in arbitrage.

This Article takes up the problem of gamification and related digital engagement practices. It considers how gamification is the nearly inevitable consequence of the rise of retail investors who trade without superior information about a stock’s fundamental value, competition on brokerage commissions, and a fragmented market structure. Yet calls for regulatory interventions often elide important distinctions between how securities law should treat active traders who prefer risk, and those with preferences distorted by gamification. This Article explains how we got here; examines the social-welfare case for regulating gamification and related digital engagement practices; offers a typology of techniques that securities regulators can adopt in response; and assesses these interventions against existing securities law doctrine and policy. This Article also considers how the securities laws’ tenuous relationship with innovative stock-market technology shapes how retail investors engage with financial markets.

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