SEC Advances Research on “Simplifying” Trading With Online Brokers, Says Gary Gensler

SEC Advances Research on

Gary Gensler, former chairman of the Commodity Futures Trading Commission, testifies during a hearing of the US Senate Banking Committee on Systemic Risk and Market Surveillance on Capitol Hill on May 22, 2012 in Washington.

Jonathan Ernst | Reuters

The Securities and Exchange Commission said on Friday it was investigating so-called gamification and behavioral signals used by online brokerage houses and investment advisers to encourage people to trade more stocks and other securities. .

The main Wall Street regulator said investors could be misled by optimistic estimates of technology earnings that, in fact, underestimate the risks of a particular investment or the chances of staggering returns.

SEC Chairman Gary Gensler said in a statement: “While new technologies may give us greater access and product choice, they also raise questions about whether we are properly protected in as investors when we do business and take financial advice. ” “In many cases, these characteristics can encourage investors to trade more frequently, to invest in different products or to change their investment strategy.”

The SEC often calls on the public to comment on Wall Street before drafting new rules and regulations, which means Friday’s announcement, while procedural, could cause headaches for industry executives.

Shares of Robinhood Markets, the operator of a popular digital trading platform that has come under scrutiny for its client-traded signals, fell 1% to the day’s low at following the SEC report.

The commission said investment firms and online brokers would often use “predictive” analysis tools designed to show clients what they would earn with optimal – but not necessarily – results.

While brokers may reveal that their predictive models are not a guarantee of future returns, Gensler said they are keen to gather investor views on the gaming features of financial platforms, the behavior tends to be traded more. frequently. and “is designed to be combined with other digital elements or functionality. Retail investors on a digital platform.

As part of the announcement, the SEC said it will collect public comment for 30 days after the request and comment submission forms are made available online.

Gensler said he was particularly interested in hearing from the public on two key issues.

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First, the SEC chairman wants to know how the financial regulator should protect investors from potential conflicts of interest.

Online brokers make profits when their clients trade more frequently. Robinhood Markets, for example, makes money by sending clients’ orders to high-frequency traders in exchange for cash. The process itself is controversial and is known on Wall Street as the Order Payment Flow.

But if game-like signals or congratulatory messages from online brokerage firms cause clients to over-trade – and especially if more trades cause the portfolio to perform poorly at slightly lower prices – should the SEC step in? ?

Gensler’s second important question is a little more bewildering.

In summary, the SEC seeks to answer: Should the regulator view the in-app signals as formal investment recommendations or investment advice if a brokerage’s predictive or game-like signals consider? optimal results and how often do clients trade? should?

The SEC often calls on the public to comment on Wall Street before drafting new rules and regulations, which means Friday’s announcement, while procedural, could cause headaches for industry executives.

Despite exceptional growth as Millennials’ favorite stock trading app, Robinhood has faced regulatory hurdles regarding digital engagement with its millions of customers.

In June, the Financial Industry Regulatory Authority imposed the largest fine on Robinhood ever, totaling nearly $ 70 million. FINRA said its fines were imposed in March in response to Robinhood’s technical failures during the trading frenzy, including a lack of due diligence before allowing clients to place options trades and giving clients misleading information. on aspects such as margin trading. Was.

CEO Vlad Tenev testified before the U.S. House Financial Services Committee in February about GameStop’s trading frenzy in early 2021.

Robinhood also paid the SEC $ 65 million after being accused of misleading customers about how the app makes money and failing to promise the best execution of trades.

In response to the public backlash, Robinhood has taken steps to respond to some of the inquiries, including providing more educational services to its clients and removing the confetti feature when investors are trading.

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