Online brokerages generate profits when their customers trade more often. Robinhood Markets, for example, makes money in part by sending its customers’ orders to high-frequency traders in exchange for cash. That process is itself controversial and known on Wall Street as payment for order flow.
But if game-like prompts or congratulatory messages from online brokerages cause customers to make more trades — and especially if more trades result in poorer portfolio performance at slightly worse prices — should the SEC intervene?
Gensler’s second key question is a bit more cerebral.
In essence, the SEC wants to answer: If brokerages’ game-like or predictive prompts assume optimal outcomes and impact how often customers trade, should the regulator consider those in-app prompts as formal investment recommendations or investment advice?
The SEC often solicits public commentary before drafting new rules and regulations over Wall Street, meaning that Friday’s announcement, though procedural, could pose a headache for the industry’s leaders.
Despite outstanding growth for the millennial-favored stock trading app, Robinhood has faced regulatory headwinds regarding its digital engagement with its millions of clients.
The Financial Industry Regulatory Authority in June slapped Robinhood with its largest ever penalty, totaling about $70 million. FINRA said its penalty came in response to Robinhood’s technical failures in March during a rash of trading mania, its lack of due diligence before approving customers to place options trades and peddling misleading information to customers about aspects like trading on margin.
CEO Vlad Tenev testified before the U.S. House Financial Services Committee in February regarding the GameStop trading mania in early 2021.
Robinhood has also paid the SEC $65 million after being charged with misleading clients about how the app makes money and failing to deliver the promised best execution of trades.
In response to the public backlash, Robinhood has since taken steps to address some of the scrutiny like providing more education services from its clients and removing the confetti feature when investors make trades.