The Financial Conduct Authority (FCA) has issued a warning to trading app operators to “review design features, including those with game-like elements, which risk prompting consumers to take actions against their own interest”.
Millions of people bought shares for the first time during the pandemic using trading apps. But some encourage risky behaviour and use manipulative programming to keep users engaged.
The regulator found a range of app features “of concern”, such as falling confetti celebrating a stock trade, the use of trader leaderboards, frequent push notifications with market news and the setting of default investment amounts.
The FCA surveyed 3,000 app users and looked at their risk appetite and investment choices. If they chose a high-risk investment (such as crypto assets) but had a low or medium risk appetite, they were flagged as engaging in investing potentially beyond their risk appetite.
The survey found that “trading apps using more features of concern were associated with consumers investing potentially beyond their risk appetite, problem gambling behaviours and frequent trading”. The FCA research found a fifth of retail investment app users were at risk of problem gambling, with 4 per cent had "problem gambling behaviour".
A report from last week, from global investment professionals association the CFA Institute, recommended trading apps move away from one-click transactions towards features that allow for review and reflection by users, as well as designing reward and feedback systems that focus on long-term investor outcomes rather than on transactions or short-term performance.
The CFA report looked at a broad range of features that can potentially have a game-like effect on users, from leaderboards and social trading, to visually appealing designs, to copy trading, where customers can see trades from other investors. Zero-commission trading and free shares offered for referrals can complement gamification techniques and potentially be drivers of excessive trading.
“Gamification can be a powerful tool for increasing financial literacy and attracting new and younger audiences to investing,” said Sivananth Ramachandran, director of capital markets policy at CFA and author of the report.
“However, the techniques that are so adept at increasing user engagement are often leveraged to drive excessive or high-risk trading, or to encourage other harmful behaviours at the expense of investors.” He recommended a warning be attached to trading apps, saying "excessive trading may be injurious to financial health".
In the US, Robinhood (US:HOOD) is the app that has caused the biggest worries over gamification. Robinhood got rid of its confetti 18 months ago, but its payment-for-order-flow revenue stream means it needs to keep the volume of trades high. Wider equity market conditions have made this tougher, however: September quarter results from the platform showed a one-third drop in monthly active users on a year ago, to 12mn.
One of the UK's largest platforms, Freetrade, told Investors' Chronicle gamification aimed just at increasing trading volumes was damaging to the investing space.
"Behavioural economics and design should be harnessed by companies to help support customers in making better long term decisions, not engage in speculative and harmful behaviours like day trading," said the platform's head of communications Alex Campbell.
One of the UK's other major platforms, eToro, markets its copy trading heavily - using a football metaphor in its ads - and users can rank these traders on leaderboards.
UK managing director Dan Moczulski said eToro "absolutely [agreed] with the FCA’s view that there is no place for [gamification] in investing". He added that the copy trading feature was designed to help "time-poor users to make more informed investment decisions, and for it to work properly, we need complete transparency when it comes to past performance".
