The Stock Market is Not a Game
Have you ever been to Las Vegas? The slot machine’s jangle, beeps, and chimes mix with laughter, cheers, grumbles, and sighs as dice get tossed, roulettes are spun, and cards get laid on the table. The atmosphere is electric, tense, and often overwhelming.
If you’ve ever visited the New York Stock Exchange trading floor or seen the trading pits at the Chicago Mercantile Exchange, you know they’re equally loud, intense, and hectic. Traders shouting orders in the pits gave trading electricity and an air of mystic. Unfortunately, most exchanges have closed their trading pits, replacing them with electronic platforms that fail to replicate the intensity.
However, the move to online platforms and electronic trading has caused a new concern to emerge, centered on the artificial aura and electricity some brokerage firms are creating to encourage trading. “Gamification” is the term being used to describe it.
Recently, the Securities and Exchange Commission (SEC) announced its plans to dig deeper into the trading practices and strategies that online brokerage firms are using to entice folks to trade more often. Regulators are concerned unsophisticated investors are being lured into investments and strategies much riskier than they are led to believe.
A new crowd of millennial and amateur investors has invaded Wall Street in the past two years. Their platform of choice? Robinhood. Between March 2020 and March 2021, Robinhood experienced a 151% surge in new funded accounts and now has more than 18 million funded accounts.[1]
Many of these new investors don’t understand the “payment for order flow” strategy that Robinhood and other “no-fee” online brokerages use. What happens is the broker receives payment from a market maker for sending them their trades. When doing this, the trades are executed outside the exchanges.
These brokers advertise “no fee” trading to the investor, but these order flow arrangements provide substantial compensation from the market maker. The problem for the investor? These types of trades are at risk of getting executed at prices different from the best price available. They may not be paying a commission, but the poor execution costs them plenty.
The SEC’s concern is online brokerages using “payment for order flow” strategies are also engaged in questionable practices that encourage investors to trade more frequently to boost their revenues. The SEC’s report noted, “payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices.”
“Digital engagement practices” are what others call the “gamification” of the stock market. In other words, online brokers, like Robinhood, have made buying and selling stocks more like a game at a casino. Some have even gone so far as to design their platforms with more “game-like” features, including point systems, rewards for trading, leaderboards, and even bonuses.
In fact, Robinhood and Webull have both offered a “free” stock when you register to use their online trading app, and more free stocks when you refer/invite friends to register. Robinhood has also provided cash rewards to users who deposit funds into their brokerage accounts.
The end goal of these features is to boost engagement and encourage more trading.
Throughout my career, I’ve heard more than enough people claim to have trading strategies that worked. In the interest of full disclosure, I should note my belief that you buy good companies and hold them; that is, you invest. You just can’t count me among those who see highly-active trading as the path to financial success.
The problem with gamification is that it divorces investing from the fundamentals of the investment. Stocks get hyped, trading picks up, and the stocks start to move; it becomes a self-reinforcing cycle as more traders jump on board. That is until it stops, and it will stop if the fundamentals underlying the investment are ignored.
I always assume when someone starts investing, they will make mistakes. We all do; that’s how we learn. However, if the basis for each investment is devoid of any fundamental case for the investment, what is being learned?
I just can’t see how trading for the sake of trading will ever lead to a good result except for the “house” who will win either way. This is especially true if your trades are executed at less than the best prices.
Where and who you trade stocks with can significantly impact your investment returns and your ability to reach your financial goals.
At Nicollet Investment Management, we help you develop a long-term investment strategy, and then we stick with it. We buy companies with solid fundamentals based on our internal research. We stay focused on the long term. We believe you should also stick with a long-term perspective and have a plan with that in mind. If you’d like to know more, please give me a call.
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Reference Articles
https://www.thestreet.com/markets/sec-gamestop-report-gamification-stocks
[1] https://www.cnbc.com/2021/07/01/robinhood-has-18-million-accounts-managing-80-billion-after-rapid-one-year-growth-ipo-filing-shows.html