The PFOF Incentive to Trade Frequently
PFOF payments are proportional to trading volume: the more investors trade, the more PFOF the broker receives, and the more trading opportunities arise for the market maker. This creates a shared financial incentive between brokers and market makers to encourage frequent trading by retail investors. Whether this incentive actually influences platform design choices is a matter of ongoing regulatory scrutiny.
Robinhood and the Gamification Criticism
Robinhood has faced significant regulatory criticism for its platform design. In a 2021 settlement with Massachusetts regulators, Robinhood agreed to pay $7.5 million and eliminate certain gamification features that the state found exposed customers to unnecessary trading activity. The settlement, while with Massachusetts regulators rather than federal agencies, reflected growing regulatory concern about platform design and its relationship to trading behavior.
FINRA's Guidance on Digital Engagement Practices
FINRA has issued guidance on 'digital engagement practices' — the use of notifications, gamified elements, social features, and other tools in mobile trading apps. FINRA has expressed concern that some digital engagement practices may be inconsistent with broker obligations, particularly when they encourage trading activity that may not be in clients' best interests.
Investor Behavior and Financial Wellbeing
Research on retail investor behavior consistently finds that frequent trading is, on average, harmful to financial wellbeing: transaction costs (including implicit PFOF costs), taxes, and behavioral biases result in frequent traders underperforming buy-and-hold strategies. To the extent that platform design encourages trading frequency, it may harm the financial wellbeing of the very customers it is supposed to serve.