Securities trading is not a game, better investor protection is needed

If we’ve learned anything from Robinhood’s IPO and roughly $30 billion dollar valuation last week, it’s that trading apps are here to stay, and with them, a boom in the gamification of investing.

But trading is not a game — and, as lawmakers, we have an obligation to protect American investors. 

To the public, Robinhood purports to be the great democratizer of finance. To lawmakers, Robinhood claims to be a tech company. In neither case do they make a claim to be focused on maximizing investor value. Because they can’t. They use the same psychological nudges that Silicon Valley originally developed to get folks hooked on Farmville and Candy Crush. The same tools that make you waste a few more hours upgrading your imaginary barn have been harnessed by Robinhood, but now with real money at stake. They create behavioral feedback loops that push users — many of whom are not even old enough to gamble at a casino — to make trades at a higher volume and complexity than they otherwise would.

To be clear, gamification is not necessarily bad. My teenage daughters have wasted too many hours playing Sim City — but they’ve also learned a lot about the law and our constitution playing iCivics. In theory, there is no reason why responsible gamification couldn’t teach financial literacy and encourage responsible investing. But in practice, an app that is drawing young, inexperienced investors into high-volume day trades and complex options products is not prioritizing the wellbeing of its users.

Sadly, we have proof. I began sounding the alarm about Robinhood and trading apps when Alex Kearns, a 20-year-old college student from Naperville, Ill., took his own life after seeing a negative balance of more than $700,000 in his account. In his suicide note, Kearns named Robinhood, asking why how the company allowed a novice trader to get into that position. Robinhood had also failed to respond to Alex’s repeated inquiries and, at that time, did not have a customer support phone number for Alex to call. I led my congressional colleagues in calling on Robinhood directly to improve transparency and user safety and urging federal regulators at SEC and FINRA to take action to protect investors.

Over one year since the Kearns family lost their son, Robinhood continues to function like a virtual casino, gamified to harness human psychology — with designs to drive frequent short duration, roulette-like trades, ready to extract fast money from inexperienced investors.

This problem is compounded by a business model that generates revenue not based on user wealth creation, but rather on how much money downstream market players earn on those trades. When you’re playing poker, look around the table and find the fish; if you can’t, you’re the fish. Robinhood has created a business that is designed to feed fish to sharks.

This is not to say there hasn’t been any progress: Robinhood recently removed its confetti feature in response to increased scrutiny, just as they made marginal improvements to customer support after I shamed the CEO of Robinhood by dialing their virtually nonexistent helpline in February. But we are deluding ourselves if we think this problem is now solved.

That’s why I introduced the Trading is Not A Game Act, directing the Government Accountability Office (GAO) to conduct a study on the impacts of gamification, psychological nudges, and other design techniques used by online platforms to influence the behavior of investors. 

Specifically, the bill defines gamification and directs GAO in coordination with other regulatory agencies including FINRA, NASAA, SEC and the SEC Investor Advocate to look at both the positive and negative effects of gamification, examine if certain game-like features constitute as investment advice, and provide findings as well as recommendations to Congress within a 270-day deadline. 

This isn’t about access to markets, it’s about investor protection and we do a disservice when we assume that the former ensures the latter. So long as Robinhood and their ilk refuse to make the changes necessary to protect investors, the responsibility falls to legislators to keep consumers safe, and to make sure that what happened to Alex Kearns never happens again.

Casten represents the 6th District of Illinois and is a member of the House Financial Services Committee.