The gamification of trading and the case for financial literacy

Trading apps are attracting younger audiences with new investment approaches and appetites, sparking knee-jerk reactions from regulators and media. Will these misunderstandings translate into opportunities for broader and more systematic financial education? In the last days of January this year, shares of a struggling video game retailer skyrocketed 400% in the New York Stock Exchange, and American authorities were forced to speak out on a case which spread panic across the financial sector, but also shed light on emerging trends.

In the months leading up to January 2021, large US investment funds had tried to make money by betting against the struggling firm in question, GameStop, listed on the New York Stock Exchange, also known as “short selling”.

But the plan fell short.

Thanks to support from investors and better-than-expected results, the price of GameStop shares rose. This support came from an online community of amateur traders who decided to take on Wall Street and large institutional investors, the “Goliaths”. In a well-coordinated move these “Davids” bought GameStop shares en masse and drove up the value of the company.

The buying surge spread to several other low performing stocks like AMC Entertainment, Blackberry, American Airlines or Nokia, obvious victims of changing times.

The crack of the whip

Under regulatory pressure, retail brokers were forced to limit trading in the shorted stocks and increased their margin requirements to push back the buying frenzy. Robinhood, a commission-free trading app and one of the protagonists in the saga, suffered a significant backlash for the restrictions, as its mission statement is “to democratize finance for all”.

The rise of free trading mobile apps and social investing

Robinhood has drawn criticism for gamifying investing. Critics describe an app that advertises zero-commissions or “free” trading and that looks more like a video game than an investment platform, where celebratory confetti was sprayed when you first signed up until it got banned. The company seemed to have leveraged gameplay principles and design in the financial services industry, with an apparent goal to make trading fun, rewarding and ultimately more addictive to an increasingly younger audience.

The attractiveness of features like social trading, slick interfaces and colourful graphics resonates with young first-time traders. Citing a survey conducted in December 2020, Robinhood claims a younger and more ethnically diverse customer base than incumbent brokers, with Gen Zs making up 70% of its customers.

They make investment decisions with the help of advice found on social media, that is TikTok videos under the hashtag #robinhoodstocks or forums of like Reddit’s WallStreetBets, where social sentiment rather than company performance is the driver of a stock price. These platforms have been around for a while, but the pandemic brought ripe conditions for this market to thrive; stimulus checks, free time, boredom. Many newbies decided to start investing as a hobby or after seeing how much wins GameStop traders cashed in.

The good

It could be a strategic mistake to dismiss younger investors. Treating them as unserious and reserving investment for older and wealthier audiences can be a missed opportunity to educate. In an Ernst & Young paper on the subject, Global Wealth & Asset Management Leader Mike Lee talks of cross-industry convergence, where “wealth and asset management firms […] are betting that gaming techniques will help them to create enjoyable, empowering moments — and habits for their clients. Ultimately, these firms believe that gamification will revolutionize client experiences and relationships, leading to improved investor loyalty and better investment outcomes.”

He explains that making complexity simple is a great way to explain concepts like risk and reward, and that “It has the potential to create a virtuous circle of engagement, learning, trust and loyalty.” CNBC’s Julia Boorstin qualifies Robinhood as an example of how “technology can turn an industry with gatekeepers into a more open platform and force the established giants to innovate and expand.”

Gen-Zs are digital natives and see stock trading as an extension of their digital lifestyles. This means that their interaction with trading apps and platforms goes beyond the realms of financial services as they possess the skills and mindset to have tools like social media or crowdsourcing intersect with investment in a way that no traditional broker could have imagined nor anticipated.

The ugly

Albeit full of promise, this phenomenon showed it needs to be harnessed in some way. A survey by the UK regulator FCA found that these younger investors are underestimating the risks of investing and 40% do not see losing money as one. User friendly trading apps are also seen as the reflection of thrill-seeking gambling, a short-sighted frenzy for impulsive traders who probably aren’t able to handle losses.

The business case for financial literacy

This year might have unveiled opportunities for financial education, a chance to embed education within brokers’ offering with free educational tools or personalised webinars in a more engaging and rewarding way. Gamifying learning is a known approach for optimising results. In the financial services sector, increasing financial literacy could involve free material explaining concepts like liquidity, management, inflation, diversification in fun and engaging ways with more innovative graphic design or virtual reality.

Online brokers should recognize the need for a fresher approach. Disclaimers are not enough, there is a real opportunity to create value throughout the financial service lifecycle, from onboarding to cashing out.

Today’s traders must be empowered to have optimal control of their financial decisions and a sound understanding of the risks and find the necessary help or resources before any problem arises. Educated traders means dedicated traders who build trust in your brand and help retail trading grow sustainably.