The rise of self-directed trading has revolutionized the capital markets by enabling individuals to invest easily in stocks, ETFs, and cryptocurrencies via electronic trading platforms. While this has democratized investing, it has also facilitated risk-taking behavior, exacerbated by the gamification of these platforms.
Gamification involves applying game-play elements such as points, competition, and rules to non-game activities to enhance engagement. In investing, gamification aims to simplify finance, making it more accessible and engaging, while encouraging active market participation. The CFA Institute's 2022 Investor Trust Study found that about two-thirds of investors under 45 have trading accounts, with many citing entertainment and speculation as primary reasons for trading.
However, the thrill induced by gamification can lead to reckless trading. The most public example is GameStop Corp. (NYSE: GME), where social media-driven trading caused its share price to spike 2,700% in January 2021, followed by an 86% drop. The SEC's report on this event highlighted the volatility and the surge in individual accounts trading GME, which rose from fewer than 10,000 to nearly 900,000 in January 2021.
Similarly, GME options trading saw a dramatic increase. In early 2020, GME options traded a median of 16,000 contracts per day, which soared to a median of 84,000 contracts by the fourth quarter. This activity was heavily facilitated by retail brokers, with three brokers accounting for over 66% of individual accounts trading GME options.
The SEC's investigation into the GameStop incident spotlighted operational conflicts of interest in electronic trading platforms, particularly payment for order flow (PFOF). PFOF incentivizes brokerages to route orders to market makers paying the highest PFOF, potentially compromising the best execution for customers. Gamification encourages continuous trading, benefiting platforms financially while exploiting users' habit-forming behaviors.
In response, the SEC proposed a rule to address conflicts of interest associated with predictive data analytics, aiming to mitigate gamification's adverse effects. The rule requires that any technology placing a broker's or adviser's interests ahead of an investor's must neutralize or eliminate such conflicts.
Beyond these regulatory measures, gamification has other drawbacks, such as promoting risk-taking and fostering a short-term investment mindset. This can lead to investors missing out on the benefits of compounding returns due to focusing on immediate feedback. Increased trading frequency also generally benefits platforms but negatively impacts retail investors.
For those seeking to learn investing without the risks of gamification, platforms like The Options Institute offer educational resources. Owned by Cboe Global Markets, The Options Institute provides courses and tools to help investors navigate options trading. Additionally, products like Cboe's XSP Index options offer accessible and cost-effective means for smaller traders to hedge, speculate, and generate income.
While gamification makes investing entertaining, it is a fleeting aspect that can exploit investors. In contrast, education platforms provide pathways for meaningful and gradual skill development in investing.
