Addictive share trading apps rigged for impulse buying

Share trading platforms now feel like games — all to entice rookie investors into spontaneous buying and selling. Finance experts are worried.

ASX 200 bank share trading depicted by red buy and sell dice tumbling across a sheet of data in colourful graphics

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Experts have warned some share trading apps and platforms are deliberately designed to be addictive — and lure users into impulse buying.

The theory is that broker platforms take a cut in each transaction, so naturally they prefer users to buy and sell more. There is no incentive for any online broker to encourage 'buy and hold' strategies.

The apps are therefore rigged in a similar way to social media or gambling sites — designed to get the endorphins pumping when the numbers light up.

And the issue is becoming more prevalent as low-cost platforms have entered the market in recent years.

"These trading apps encourage addiction and gambling," RMIT senior lecturer Angel Zhong told The Motley Fool.

"A big selling point of these apps is the low transactional threshold, which encourages investors to buy low-priced stocks. In finance research, low price [is] a feature associated with what we called the 'lottery-like' stocks. They are highly risky."

Superhero and Robinhood: our saviours or villains?

In the United States, zero-brokerage app Robinhood has been credited with making investing more accessible to the masses. 

But it's also been blamed since COVID-19 for allowing inexperienced investors to make speculative bets. Not only is this dangerous for novice shareholders, but some experts argue it makes markets more emotional and volatile

A new ASX share trading app — Superhero — launched this month. It's been dubbed the local version of Robinhood for charging just $5 a transaction with a minimum investment of just $100.

According to The Australian Financial Review, Superhero has signed up a new user every 20 seconds since launch.

Platforms like IG and eToro have also paved the way for low-cost trading in recent years..

But it's not just new apps going low. The older players have been forced to follow, as the broking industry becomes more commoditised.

For example, CommSec Pocket last year allowed a $50 minimum investment for a basket of exchange-traded funds (EFTs).

Zhong, who specialises in investor behaviour and biases, said the clean and simple interfaces of the new apps hook the novice user in.

"They claim that it makes it easier for investors to understand stocks. But at the same time, the simplicity encourages retail investors to trade without undertaking thorough research."

Research firm IBISWorld calls this the "gamification" of online share broking. The apps are designed to feel like playing a game. 

Success is like a drug.

Selfwealth Ltd (ASX: SWF) is a prototypical example of a platform that uses gamified investing.

"SelfWealth [has] gone one step further, incorporating social-network features, such as allowing members to compare their investment performance with each other," IBISWorld stated Monday.

"SelfWealth had 22,000 active investors in February 2020, while in June 2020 it had grown to almost 140,000."

How delayed market data encourages impulse buying

Zhong told The Motley Fool that many trading platforms had expensive plans that offered real-time data, while cheaper subscriptions only showed delayed information.

And this was a psychologically effective way to poke a novice investor into dangerous spontaneous transactions.

"The limited data provided to retail investors exacerbate their impulsive buying and selling, as they can't see a complete picture of the underlying stock."

Users of low-cost apps are also more likely to be involved in social trading.

"Social trading refers to exchange of stock trading ideas in groups and discussions on social media websites such as Facebook, Twitter and Reddit," said Zhong. 

"Retail investors are easily influenced by unmoderated commentary on the market and investing. With easy and low-cost trading platforms, retail investors may act on misleading information from social trading and suffer losses in a highly volatile market."

'Gamified' apps are disrupting online broking industry

Rookie investors have flooded the share market since COVID-19 broke.

During the first lockdown between late February and the middle of May, retail investors bought $9 billion of shares while institutional investors sold off $11 billion.

"The 'gamification' of investing has made equities far more accessible to tech-savvy demographics," said IBISWorld senior industry analyst, Matthew Barry.

"'Faltering trust in Australia's big banks, particularly in the wake of the banking Royal Commission, may be another factor driving young consumers to alternative investment platforms."

Barry said the older trading platforms now needed to match the user experience of the addictive new apps to stay competitive.

"Traditional brokers will need to gamify their user experience over the next five years, by significantly increasing the usability and capability of their smartphone applications," said Barry.

"Convenience and simplicity are critical to attract and retain young first-time investors."

There will also be a race to the bottom for brokerage fees.

"Fierce price competition from new entrants is projected to erode margins for brokers across the industry, as consumers continue to demand cheap fees and demonstrate weakening loyalty to their existing brokerage providers," Barry said.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Online Brokers

asx company executive with multiple fingers all pointing at him
Share Market News

ASX ordered to take a good look in the mirror

Broking firms have also been told off by ASIC for solely relying on ASX and not having alternatives like Chi-X…

Read more »

⏸️ Online Brokers

Why zero-fee apps will never exist for ASX shares

US share trading platforms don't charge brokerage fees. So why are we slugged for every little ASX share transaction?

Read more »

Free shares represented by two people throwing money in the air on a bed
Share Market News

How to get free Airbnb (NASDAQ:ABNB) shares

Australian online broker Stake is giving away the hottest IPO stock this year. Here's how you can grab your Airbnb…

Read more »

investor looking at asx share price online with cash pouring from computer screen
⏸️ Online Brokers

How do zero-fee share trading apps make money?

If these companies give their products away for free, how do zero-fee share trading apps magically generate revenue?

Read more »

asx share price data represented by clock saying real time data
⏸️ Online Brokers

Real-time ASX price data becoming FREE for regular punters

Is this the new frontier in the online brokerage price war? Is it a victory for ASX retail investors?

Read more »

share trade broking platform free offer represented by the word free lit up on wall
⏸️ Online Brokers

Share trade platform provides free $1 million protection for clients

Think your online broker can't collapse? Many Australians have lost their life savings from their share trading platform going broke.

Read more »

person holding phone and typing on laptop keyboard with images of floating financial icons
⏸️ Investing

How do I choose a broker?

The fourth article in The Motley Fool's Millennial Investor Series explores how a stockbroker works, and what to look out…

Read more »

a woman
Motley Fool Take Stock

CommSec's $10 brokerage to buy and sell shares: the pros and cons

Buy and sell shares for only $10 brokerage? What's the catch?

Read more »