A study says that DIY investors make a worse decision when the platforms are trading

A study says that DIY investors make a worse decision when the platforms are trading

A new study finds that trading platforms that reward investors themselves through “gamification” strategies increase the risk of losses in online portfolios.

In a research report due for release Thursday, the Ontario Securities Commission in collaboration with the UK-based Behavioral Insights team found that investors who earned rewards from trading platforms — such as digital points or badges online for buying or selling stocks — made nearly 40 percent more money. cent more trades than those who were not exposed to the same gamification rewards.

Gamification is the practice of incentivizing users to trade more frequently or in larger amounts by adding game-like features to trading platforms. Competitive features such as leaderboards, which display the names of users making the most trades in a day, images of badges or snippets of paper that reward the first trade in a margin account or a family referral, encourage investors to trade more often.

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In addition, the OSC found that investors who were featured on “Most Traded” or “Most Popular” lists Stores They were 14 percent more likely to buy and sell shares of the company they were pushed towards. Top stock lists promote “herding” behavior – a person follows what others are doing rather than making the decision independently.

Grazing can lead to “much weaker” returns for investors, the report said, citing a separate study that showed an average 20-day return of negative 4.7 percent for the top stocks bought each day. That’s because grazing increases the frequency of trading, and can divert investors to riskier securities.

Other incentives, such as setting a goal tracker, were found to have no negative association with investor behavior or how often they trade.

As a result, the OSC recommends that regulators — such as the Investment Industry Regulatory Organization of Canada, which oversees discount brokers — consider whether to restrict digital trading platforms from offering points or rewards for trading activity.

More broadly, we encourage regulators to consider whether any of the gamification and behavioral approaches examined have similar features to the recommendations and/or lead to investor behavior. [on average] hurts investors’ results,” added OSC.

The study involved 2,430 participants, who were given $10,000 in play money to buy and sell stocks in a simulated digital trading environment.

During the pandemic, Ontario’s provincial watchdog began to pay greater attention to the impact of gamification on retail investment as the number of DIY investors – many of whom were New to investing – began to rise as Canadians poured their COVID-19 savings into the marketplace.

They are also known as order execution only (OEO) sites, and discount brokers Regulations prohibit it From providing any kind of investment advice to clients. But the lack of advice is now becoming a problem for trading platforms that have a growing number of inexperienced investors.

In 2021, more than 3.6 million new DIY accounts were opened with discount brokerages, according to data provided by Toronto-based Investor Economics, a unit of ISS Market Intelligence. That was up from 2.3 million in 2020, and 846,000 in 2019.

In addition, a wave of mobile-only self-directed platforms has appeared in both Canada and the United States, along with several no-fee trading platforms, leading to an increase in the number of participants who can easily create accounts with just a few clicks on a phone.

The gamification business model first grew in popularity with fintech startup Robinhood Markets Inc. hood-kFree online trading platform. Robinhood has begun rewarding its users for trading more frequently, trading in larger amounts, and trading in riskier products, such as margin accounts.

In 2021, the US Securities and Exchange Commission cited concerns about gamification, saying the features could encourage investors to trade more often, invest in products that may not be suitable for them, or affect their risk tolerance.

OSC, in its report, found many incentives that can influence investor behavior. In addition to leaderboards and badges, some discount brokerages may use “gambling” rewards with economic benefits such as cash payments or language that elicits gambling, such as jackpots or top-up cards.

“Trading frequency or volume is a critical behavior that deserves attention, given the strong negative correlation with investor return,” the OSC said in its report. Offer rewards [points] of little economic value may lead to significantly increased frequency of trading.”

The study urges regulators to fill in “major gaps” in empirical evidence by collecting more data through studies as well as data that can be collected directly from digital trading platforms that have implemented gamification or other behavioral techniques.

“These actions will enable the OSC and other regulators to develop new, pilot-based regulatory strategies and approaches,” the OSC added.

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