Abstract

In a world where most financial institutions and services have shifted to online platforms, it comes as no surprise that capital markets and trading have followed suit. The transition from trading bulletins and face-to-face road shows to telegraphs and landlines was slow, reflecting the unfamiliarity of a new regulatory scheme. But recently, brokerages and trading platforms have evolved at unprecedented rates, matching the pace of technological advancement in an effort to be the most innovative and advanced. Two factors are now key among firms and platforms that claim to be the most sophisticated—the extent of gamification and AI-integration.

Where there’s smoke, there’s fire; and where there are large sums of money, there’s fraud. Since its establishment, the Securities and Exchange Commission has fought fraud in the market. The SEC diligently follows reports of fraud with a firehose, putting out fires as they arise and attempting to promulgate preventative regulations as market arsonists discover new mechanisms of deceit. However, when it comes to gamification and artificial intelligence, or “AI”, the SEC has traded its fireman’s uniform for a politician’s pressed suit, choosing strategic vagueness (or even silence) to avoid backlash.  

This article argues that the SEC’s prior resolution to address fraud in the market should continue as new threats, especially those from the simultaneous implementation of gamification techniques and AI systems, emerge. Technological advancement has created new mechanisms for exploitation and deceit that are still being researched, and, as they are discovered, the SEC should proactively promulgate regulations to protect new investors from money-hungry broker-dealers. Part II of this article provides a background on the traditional roles of market players, including broker-dealers, and the securities laws that were designed to protect investors from fraudulent transactions. Part III explores the introduction of gamification investment companies into the financial markets and the positive and negative impacts they have had on investors, sophisticated and unsophisticated, alike. Part IV lays out the AI systems generally used by brokerages and the potential pitfalls that can be encountered through implementation of these systems. It also discusses concerns the SEC has voiced about the use of AI in financial markets and emphasizes the agency’s lack of action. Part V discusses the potential harms caused to unsophisticated investors by e-trading platforms, such as Robinhood, which simultaneously uses gamification tactics and AI. With this background, Part VI then goes on to propose suggested regulatory schemes for the SEC to adopt to address these concerns and also discusses the problems that might arise in implementing such regulatory regimes.  

Keywords

Kumar, Tanvi Kumar, Securities Act of 1933, Securities Exchange Act of 1934, Traditional Market Players, Securities, Key market Players, Computerization, Capital Markets, Technological Advancements, Gamified Investment Companies, Gamification, Artificial Intelligence, FINRA, Robinhood, SEC, Pluto, Generative AI, Legislation, Regulatory Framework