There is an ongoing debate around gamification within trading. Many years ago, I worked on the relaunch of the financial spread betting platform for a major forex broker. Part of the rationale for that relaunch was to make trading more accessible, less intimidating, more, dare I say it…fun?
To some critics of the recent success of Robinhood as a trading platform in the US, this gamification of trading is making many investors think of the markets like a more sophisticated and much more expensive computer game. Some argue that it encourages gambling rather than sensible investment decision making.
“In my view, gamification starts already if you use smartphones to invest or trade,” says Krisztian Gatonyi, a senior analyst at BrokerChooser. “Many beginners who do not even know the difference between investing and trading are encouraged by Robinhood’s visually appealing features to buy and sell stocks frequently. Game-like features can manipulate beginners to increase the number of their transactions, which is good for Robinhood’s Payment for Order Flow (PFOF) model, but not for users.”
His argument is that Robinhood, in its quest for data and revenues, is trying to encourage younger or less experienced traders to actually embrace bad habits thanks to the way the broker has created its interface.
The more frequently beginners trade, the more likely they end up losing money
The length of time that investors hold shares has been decreasing for decades. The average holding period is currently at an all-time low of around six months for US shares – in 1999, the average was 14 months.
Gatonyi argues that the incentives in Robinhood’s app get young customers impatient and make them believe investing is about pressing the ‘buy’ button on mobile phones. This process involves making fewer quality decisions, which in turn will lead to losses and can be addictive.
Robinhood customers have the smallest account sizes, at roughly $4,000 on average, with a median of just around $240. This compares to an average customer account size of $292,000 at Fidelity, for example. This “play amount” at Robinhood is not enough for proper money management, which might cause losses in the long run also.
Complex products are being oversimplified
“The main problem is that complex products like options are oversimplified on Robinhood’s app, making people believe investing is easy,” explains Gatonyi.
In 2020, Alexander E. Kearns, a 20-year-old student thought it was easy to trade options on Robinhood and after he saw -$730,000 on his account, he committed suicide. “Complex financial products should not be allowed to be sold to customers in a gamified package,” Gatonyi says.
Gamification supports Robinhood’s PFOF model, which the Securities and Exchange Commission is considering banning entirely. This could be problematic for Robinhood because the company receives more than 75% of its revenue from Payment for Order Flow.
“Perhaps I am too conservative, but I do not make investments via my mobile phone,” says Gatonyi. “If you get used to investing on the go, you could be distracted by anybody or anything. There is a chance that you could make an error and you’ll end up losing a lot of money. I think that mobile phones are good for checking financial data but not for investing or trading.”
He says Robinhood’s product is not about democratizing finance, it is just a casino app. “So the slogan for Robinhood should be changed to: Gambling for Everyone,” he says.
