OSC says gamification is a concern for investor protection

Study reveals how retail investors can be attracted by using gaming tactics and why that may need regulatory measures

OSC says gamification is a concern for investor protection
Steve Randall

It was 2020 when a new wave of investors first discovered buying and selling stocks.

Bored during pandemic restrictions, these mostly-younger investors were attracted to the thrill of ‘playing’ the markets by posts on social media and Reddit, and app-based trading which although not new, had a surge of interest.

But what influence do platforms such as Robinhood have on retail investors and does the ‘gamification’ of investing have implications for investor protection?

A new study from the Ontario Securities Commission (OSC) aimed to find out with a randomized controlled trial, involving 2,430 participants.

It used a standard gamification technique of giving investors points for buying and selling stocks, as well as showing them a list of top traded stocks which is a combination of two other behavioural techniques, salience and social norms.

“It is easier now to start investing thanks to digital platforms, but those same platforms may influence retail investor decision-making in a way that impact outcomes — both positively and negatively,” said Tyler Fleming, Director of the Investor Office at the OSC. “Our study examined and tested gamification and other behavioural techniques and their likely impact on retail investor behaviour.”

The short-termism of game-style investing has raised concerns of both regulators and other industry professionals.

Gerry Frigon, who is also president of Taylor Frigon Capital Management, told Wealth Professional last year that focusing on business fundamentals remains the best way to invest, rather than the short-term gyrations of stocks.

“Trying to predict these short-term moves -- or worse, trying to base one's investment strategy on predicting and timing such moves -- has always been impossible, and in the modern landscape of high-frequency trading, massive algorithmic trading schemes, and now the social-media induced get-rich-quick flavours-of-the-minute being touted on Reddit and traded on RobinHood, we would argue that short-term strategies have become more hazardous than ever,” he said.

Playing the game

The participants were in a simulated digital trading environment and were given $10,000 in play money to make their investments.

Those who were awarded points in return for trading (points that had no real value) made almost four times as many trades as the control group.

The OSC is concerned about the increased volume of trades, given that, on average, this has a negative impact on investor returns.

While platforms often offer zero or low fees for trading, there are still benefits to them of higher trading volumes. They may receive commissions from market makers and frequency trading firms for the order flow, and interest on their own investments funded by client deposits.

Following the herd

Meanwhile, those participants shown a top trades list were 14% more likely than the control group to buy or sell those stocks, suggesting that this technique can create herding, where people follow what others are doing rather than making informed decisions of their own.

The OSC is recommending that regulators conduct more research to determine “whether any of the gamification and behavioural techniques examined have attributes similar to recommendations and/or result in investor behaviour that is (on average) detrimental to investor outcomes.”