Gary 'tough cop' Gensler, the new chairman of the US Securities and Exchange Commission, told Congress recently that investors needed greater protection against a rising number of applications that use “game-like features” and “behavioral prompts” to lure them into trading in stocks, often with disastrous results.

Speaking before the House Financial Services Committee, Gensler observed that the trading apps’ gimmicks were now “implemented across many different technologies, from streaming platforms to fitness trackers,” but said that they could be harmful when applied to stock trades.

“If we watch a movie that a streaming app recommends and don’t like it, we might lose a couple of hours of our evening. If a fitness app nudges us to exercise, that’s probably a good thing. Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position. A small loss now could compound into a significant loss at retirement.”

Gensler said that he wanted to change the SEC's rules to protect investors more effectively from apps that “gameify” stock trading.

Shares in the video-game retailer GameStop surged earlier this year, leading to a short squeeze on those shares by a host of Reddit users that prompted the trading app Robinhood to limit trading. Regulators are obviously worried about the way in which trading apps may have influenced the army of small investors to use online trading platforms to orchestrate an arbitrary, spectacular rise of GameStop shares, which triggered massive losses for hedge funds with short positions on the company.

Former SEC trial counsel Nick Morgan, now a partner at the Los Angeles office of the law firm of Paul Hastings, explained the situation to Compliance Matters.

“Chairman Gensler’s comments on trading app gameification suggest that we may see an expansion of the SEC’s role in newly paternalistic ways. It might discourage or prohibit app-based trading as entertainment rather than as something akin to a “fitness app (that) nudges us to exercise” that may lead to trading losses or increase the frequency of transactions (which might lead to trading losses).  

“It remains to be seen whether the current SEC will permit brokers to provide trading tools that are fun to use in financially risky ways, even if the customers are fully informed of the risks and even though there appears to be a large demand for such trading tools among retail investors.”