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By Katanga Johnson
WASHINGTON (Reuters) – A year after the “meme stock” rally humbled hedge funds and roiled Wall Street, U.S. regulators are studying ways to crack down on psychological prompts used by Robinhood (NASDAQ:) Inc and other commission-free brokers to promote frequent stock trading on smartphone apps.
The Securities and Exchange Commission (SEC) started scrutinizing commission-free brokers like Robinhood, Webull Financial LLC and SoFi Inc last year after retail investors drove GameStop (NYSE:) and other “meme stocks” sky high in Jan. 2021.
The furious rally pushed GameStop shares up more than 1,500% at one point and created a “short squeeze” that burned hedge funds that had bet against shares of the video game retailer. Shares of movie theater chain AMC Entertainment (NYSE:) and other companies also soared.
At the height of the frenzy, several brokers restricted trading in the meme stocks, infuriating investors. Robinhood CEO Vlad Tenev and other executives were hauled https://www.reuters.com/article/us-retail-trading-usa-congress/long-tense-with-cat-photo-for-relief-how-the-gamestop-hearing-unfolded-idUSKBN2AI1C4 before U.S. Congress to testify.
The SEC has found that many brokers, as well as roboadvisors, increasingly use analytics driven by artificial intelligence, video game-like features and other behavioral prompts to encourage stock trading or to sell certain products.
Trading contests, points and rewards are just some of these techniques. There are also lively sounds and bright colors, notifications, social networking tools, and curated lists of trading and investment ideas, among other practices.
“The SEC has been very concerned that many younger investors, many of them too young to legally drink alcohol, are instead getting intoxicated by digital engagement in the market,” said Howard Fischer, a partner at law firm Moses & Singer, adding the industry is likely to push back hard.
“It is likely to have a war on its hands.”
Commission-free brokers say they are democratizing investing, making it easy and fun for anyone to trade. In a blog post on Tuesday evening, Robinhood said it had added resources to help customers learn investment basics.
Critics say commission-free brokers try to maximize retail trading volumes because they earn lucrative fees for routing orders to wholesale market-makers. This could be a conflict of interest; studies show retail investors generally lose money when they churn their portfolio.
“Americans are bombarded every day by behavioral prompts … the brokerage apps and the roboadvisors are doing that as well,” SEC chair Gary Gensler told CNBC last week. “Their motivation is to make more revenues.”
On Wednesday, Gensler said in a statement that he was looking forward to the staff’s recommendations on…
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