From Investing to Entertainment: How Gamification of Trading is Reshaping Financial Markets

The gamification of securities trading has emerged as a transformative force in financial markets, fundamentally altering how investors, particularly retail traders, make investment decisions and engage with trading platforms. As I see it, gamification operates on two fronts. First, by integrating game-like design features into trading applications, such as interactive visuals, rewards, leaderboards, and push notifications, which enhance and encourage user engagement. Second, by broadening the nature or type of assets and events available for trading, with an increasing number of speculative financial products that bear only a tenuous resemblance to traditional investment instruments and a remote connection to rational investing strategies. These practices capitalize on psychological triggers to promote frequent trading, making investing feel less like a rational and careful strategic financial endeavor and more like an entertaining activity such as gambling. As trading platforms increasingly resemble online games and offer new, non-traditional financial instruments, the distinction between investing and gambling becomes even more blurred.

Driven by technological advancements, retail brokerage firms have swiftly embraced gamification by incorporating game-like design elements into trading applications. Features like confetti animations, celebratory messages, and incentive-based rewards systems motivate users to trade more frequently. Mobile trading apps featuring these game-like designs, combined with commission-free trading, now provide seamless market access. They eliminated many traditional barriers to stock trading and made trading more appealing to a broader audience, particularly young investors. While proponents argue that these developments democratize investing by making it accessible to a broader investing public, critics contend that they distort rational investment strategies by shifting focus from long-term financial planning to short-term speculation.

The behavioral similarities between gamified trading and gambling are striking. Gambling is inherently designed for entertainment, and gamification seeks to infuse trading with similar excitement. By providing instant feedback, visual stimuli, and competitive-like elements, trading platforms exploit cognitive biases that drive impulsive decision-making. Already some industry participants are asking whether and when these digital nudges could amount to recommendations under Reg BI, thereby triggering the associated obligations meant to protect retail investors. Research strongly suggests that, while subtle, these digital nudges do exert significant influence over trading behavior. This raises the concern that broker-dealers are, in effect, making recommendations without formally acknowledging them as such.

In addition to driving trading activity through app design, the ever-expanding nature of the assets and events that can be traded further gamifies and enhances the entertainment-driven appeal of trading. This second aspect of gamification - the expanding range of speculative financial products available for trading, which appear to have a tenuous connection to rational investment activities – is perhaps less understood and covered in the media but no less influential in the gamification of trading.

One striking example of this expansion is encapsulated by the case of KalshiEx LLC v. Commodity Futures Trading Commission (CFTC). KalshiEx, a regulated commodities exchange, sought to list Congressional Control Contracts, which were designed to allow traders to place bets on the outcome of U.S. congressional elections. The CFTC blocked these contracts, arguing that they constituted gambling rather than legitimate financial instruments. Under the Commodity Exchange Act, the CFTC has the authority to prohibit contracts that it determines to be contrary to the public interest, including those that involve gaming or other illegal activities. The Commission reasoned that allowing wagers on congressional elections could undermine public confidence in the electoral process and create perverse incentives, such as financially motivated disinformation campaigns or attempts to manipulate election outcomes. The CFTC also pointed to state laws that prohibit gambling on elections, arguing that the contracts would effectively constitute unlawful betting.

KalshiEx challenged the CFTC’s administrative decision in federal court, arguing that its contracts served a legitimate hedging function, allowing individuals and businesses to manage financial risk associated with political uncertainty. The lower district court granted KalshiEx’s motion for summary judgment, reasoning that “gaming” refers to the “act of playing a game” or “playing games for stakes” and because elections are not games, the court concluded that the category does not apply to election contracts. CFTC appealed but the DC Circuit Court of Appeals ruled preliminarily in favor of KalshiEx, rejecting CFTC’s arguments and denying its motion to stay the lower court order, finding that “while the question on the merits is close and difficult, the Commission cannot obtain a stay at this time because it has not demonstrated that it or the public will be irreparably harmed while its appeal is heard.”  While the appeal is still pending, this decision underscores how this aspect of gamification—expanding the type and scope of tradable financial instruments—has been allowed to continue largely unchecked.

Indeed, this ruling has undoubtedly emboldened market participants to push the limits of what is allowed, resulting in a surge of innovative and speculative products that challenge existing regulations. Already, markets offering trading on event contracts, like KalshiEx, have seen a rise in these contracts on topics ranging from the serious to the absurd, such as:

·      Will Trump be added to Mt. Rushmore?

·      Will the Tampa Bay Rays end their new stadium plans?

·      Will DOGE send another e-mail to all federal employees asking for weekly updates?

·      Will the US say that aliens exist this year?

·      Top USA Song on Spotify today?

·      Harvard application numbers this year?

Although these event contracts are advertised as regulated financial instruments and are traded on regulated exchanges, impliedly attaining the imprimatur of financial legitimacy, they appear to be more akin to gambling than to a legitimate investment hedging activity.

As financial markets increasingly resemble entertainment-driven speculation, regulators may have difficulty distinguishing between genuine risk management tools and outright gambling on real-world events. Moreover, with the courts signaling a reluctance to curtail such speculative financial products, it appears that the boundaries of what can be traded will continue to stretch in ways that further intertwine financial markets with entertainment-driven speculation.

And, unfortunately, research on gamification’s impact on retail investors suggests troubling consequences. A recent study analyzing 17 major U.S. brokerage firms found that the introduction of gamification features significantly increased trading volumes. However, this surge in activity did not translate into better outcomes for retail investors. On the contrary, the study concluded that gamification exacerbated poor trading decisions, leading to diminished returns and increased return volatility. Specifically, the study found that each gamified update reduced retail investor returns by 0.20% and increased return volatility by 0.12%. Cumulatively, all gamification updates analyzed in the study contributed to a 27.78% decline in retail investor returns and a 17.59% increase in return volatility. See Gamification of Stock Trading: Losers and Winners, Eduard Yelagin (Nov. 10, 2024).

While retail investors suffer from worsened performance, brokerage firms and market makers reap substantial benefits. While the study found that increased trading volume resulting from gamification enhances market liquidity, making it easier for liquidity providers to manage inventory, the study also found that gamification led to a 21.07% increase in retail trading volume, which benefited broker-dealer firms that earn revenue through payment for order flow. See Gamification of Stock Trading: Losers and Winners, Eduard Yelagin (Nov. 10, 2024). As a result, the financial incentives driving gamification often conflict with the best interests of retail traders.

Regulatory bodies such as the Securities and Exchange Commission (SEC) and the CFTC have expressed growing concerns about the implications of gamified trading. The KalshiEx case exemplifies the regulatory struggle to define the boundary between investing and gambling. The court's ruling in favor of KalshiEx suggests that the current legal framework is not structured to effectively course-correct the trajectory of gamification in financial markets. Without clearer statutory guidance or new regulations, the expansion of speculative trading products is likely to continue, further eroding the distinction between legitimate investing and speculative betting.

The gamification of securities trading represents a fundamental shift in market dynamics. By making trading more engaging, brokerage firms have successfully attracted a new generation of investors. And that is a good development. However, this shift comes at a cost. The evidence suggests that gamification encourages excessive risk-taking, reduces returns for retail investors, and disproportionately benefits financial intermediaries. As regulators and policymakers navigate this evolving landscape, the challenge remains to balance innovation with investor protection, ensuring that financial markets serve their intended purpose rather than becoming platforms for speculative entertainment.