Apps Like Robinhood Make Trading Fun, But SEC Fears It’s Costing Investors

livemint.com:

WASHINGTON—Federal regulators want to impose new guardrails on the way retail investment firms such as Robinhood Markets use advanced analytics to encourage customers to trade, the latest in a series of policy efforts prompted by the 2021 meme-stock craze. The Securities and Exchange Commission plans to propose a rule Wednesday that would hold algorithms that predict, guide or forecast investors’ behavior, in certain cases, to a similar standard as investment advice. It would require brokers and advisers who deploy such tools to “neutralize or eliminate" conflicts of interest they create.

The agency’s goal is to prevent emerging technologies from undermining firms’ legal obligation to act in the best interests of their clients. Republican SEC Commissioner Mark Uyeda, however, said the rule is so broad it could encompass common tools for exploring investing strategies. The rule proposal stems from a two-year SEC review of Wall Street’s “digital engagement practices" following the trading frenzy in GameStop and other meme stocks in early 2021.

That episode sparked congressional hearings, a 45-page SEC staff report, and a series of sweeping proposals to change the way stock trading works behind the scenes. Regulators worried that by bombarding investors with push notifications, colorful graphics and gamelike features, brokerage apps could induce users to trade too much for their own good. While individual investors tend not to benefit from frequent trading, such behavior can be lucrative for market intermediaries.