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Many individuals who invest through online platforms think the market is rigged against them, and they blame the Securities and Exchange Commission for failing to protect their interests.
That’s according to an FA-IQ analysis of responses to an SEC request for comment on the use of digital engagement practices by broker-dealers and registered investment advisor firms.
The SEC asked for inputs on the use of behavioral prompts, differential marketing, game-like features or gamification, and other design elements or features aimed at engaging retail investors on digital platforms, such as websites, portals and applications, as reported. The comment period ends on October 1.
An analysis of the first 1,525 comments submitted to the SEC as of Wednesday last week revealed that investors are much more concerned with alleged market manipulation by hedge funds and what they perceive as the SEC’s reluctance to penalize them while instead scrutinizing game-like features on investment apps.
Many respondents alluded to the GameStop trading frenzy earlier this year. GameStop’s stock price soared in January after day traders on social media sites, such as Reddit’s Wall Street Bets community, encouraged others to buy the shares to wipe out the hedge funds or short sellers in the stocks.
At a U.S. House Committee on Financial Services hearing in May about the GameStop trading controversy, SEC chair Gary Gensler said the regulator is considering new rules for investment apps that include features like gamification, behavioral prompts and push notifications, as well as social trading that lets users see what other investors are buying or selling.
It appears that some of those who submitted comments to the SEC interpret the regulator’s action as a move against online retail investors.
“Why allow the [hedge funds] to naked short then turn around and blame retail traders for GameStop and AMC,” a commenter wrote, referring to another stock that was talked up on social media sites last winter. “Stop blaming us and implement changes to make investing [f]air.”
When asked to share their experience with the features of the online trading or investment platforms they use, 46% of the 932 commenters who answered instead spoke out about their concern over the SEC’s actions and hedge funds. Gamification was brought up by 15% of the respondents.
The rest commented on various topics prompted by the SEC, such as social networking tools; games, streaks, or contests with prizes; points, badges, and leaderboards; notifications; celebrations for trading; visual cues, like changing colors; ideas presented at order placement or other curated lists or features; subscription and membership tiers; or chatbots.
Some commenters wrote about what they believe is the unfair advantage hedge funds have over retail investors.
“The retail investor market is 100% manipulated by dark pool rerouting, and naked shorting of all stocks available,” wrote one commenter. “Buying any security on any platform … is simply holding the security until the hedge fund market makers manipulate it your way. The SEC has failed the retail investor …”
Another commenter wrote: “My experience with online retail trading is that retail traders are at a disadvantage, and that brokerages reserve the right to illegally refuse our right to buy whatever stocks we want, at whatever price … My experience is that free markets are an illusion, and that media is a shill propaganda horn for the wealthy.”
The commenter was referring to retail investors losing access to their investments apps when they wanted to unload GameStop and other stocks during the share price rally.
In a February blog post, Robinhood Markets CEO Vlad Tenev explained how robo-advisor Robinhood Financial had to impose “temporary trading restrictions on certain securities” in January. The “massive” increase in trading activity and volatility “in a handful of stocks” meant that trading had to be halted so clearing broker Robinhood Securities could post the additional firm capital that was required, he wrote.
Robinhood entities, brokerages such as Morgan Stanley and fund firms such as Citadel Securities and Melvin Capital Management were sued in February for allegedly conspiring against retail investors in relation to trading in GameStop shares and other stocks. The suit accuses the firms of taking part in “a large, overarching conspiracy to prevent the market from operating freely and to stop the Defendants from hemorrhaging losses as a result of their highly speculative short selling.”
Click this article for a profile of the commenters’ online investing practices: These Online Retail Investors Could Be Your Clients Someday
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