Many popular investment brokerages and trading apps have designs and features that encourage overtrading - making an excessive number of trades that are ultimately detrimental to returns. While trading volumes make these companies more money in fees and data sales, overtrading tends to significantly reduce investors' long-term gains. In this article, we’ll explore some of the problematic ways these platforms promote superfluous trading and why it’s bad for customers.
Gamification Tactics
One of the most common ways brokerages encourage excessive transactions is through gamification - applying game-like elements to increase engagement. Many apps incorporate colorful charts, virtual confetti, points or badges for trading milestones all which trigger the human brain’s reward system. Research shows these visual cues promote impulsive decision making and emotional trading detached from financial logic and can be highly addictive. While trading volumes rise, performance typically suffers from the frictional costs and speculative bets.
Push Notifications
Trading apps also frequently employ push notifications to spark engagement. Alerts about stock price swings, market volatility or technical signals urge investors to constantly check the app and make moves. However, research suggests push notifications significantly erode focus while promoting anxiety and addictive checking habits. This Pavlovian response conditions investors to reactively trade based on the latest ping rather than sticking to a systematic investing approach. The convenience of mobile access combines with alerts to enable detrimental overtrading.
Simplified Interfaces
Many popular trading platforms also appeal to novice investors by presenting overly simplistic interfaces that mask the complexity and risks of active trading. Features like swipe trading, one-click ordering, and simplified options order pages make placing trades extremely easy without much financial education. Consequently beginners tend to trade more frivolously without fully grasping risks like leverage, volatility and downside loss potential. By dramatically reducing friction, simplified apps cater to entertainment and promote illusion of control rather than responsible investing.
The High Costs of Overtrading
Beyond the psychological exploitation, overtrading also inflicts steep financial costs that destroy net returns. More transactions drive up trading fees, commissions, spread costs, and taxes which take a huge bite of portfolio performance. Death by a thousand cuts is indeed the most apt analogy for how excessive trading incrementally bleeds accounts. Even with low or no fee brokerages, excessive trading has costs that add up. Bid-ask spreads - the difference between the lowest ask and highest bid prices - is essentially a hidden trading tax that evaporates 2-6% of notional trade values. Though the $5 trade fees are gone, spread costs continue to quietly transfer cash from traders to market makers. Further, overtrading often locks in losses and realize suboptimal gains through premature selling - destroying additional value through poor trade timing. Compounding and loss aversion are the two mathematical phenomena that drive long-term portfolio returns. By impatiently trading in and out of positions, investors forfeit their portfolio's upside compounding which serves to geometrically increase gains over multiyear periods. At the same time, realizing losses via overtrading causes permanent erosion of capital that can never be recovered. Therefore overtrading manages to undermine both compounding upside and loss downside - mathematically guaranteeing destruction of an account’s expectancy value.
The Responsibility of Brokerages
Given the severe downside posed by addictive overtrading apps, brokerages that profit by promoting excessive transactions are clearly breaching their fiduciary duties to clients. Rather than designing platforms to enable clients’ best interests, the current engagement-driven models prey on human weaknesses for their own short-term profit goals. By combining variable reward schedules, potent alerts, one-click simplicity, real-time tracking, and positive feedback cues, these apps have perfected a dangerous recipe for conditioning overtrading addiction. The costs are real client capital continually extracted and transferred to the brokers and market makers.
While slick trading apps have enabled zero-fee access to financial markets, they’ve also lowered the bar for uninformed speculation by novice traders. By exploiting behavioral weaknesses and promoting excessive engagement, the brokerage industry must shoulder some responsibility for the problematic outcomes borne by consumers. Until reforms realign broker incentives with clients’ success, investors should educate themselves on how destructive overtrading truly is for their portfolio expectancy and long-term returns.
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