Why It Sucks To Be A Regulator Right Now Part 1
The recent Reddit rampage through stock markets has brought the issue of fair access to trading capital markets to the fore.
While the anger has been directed at institutions, there is a broader issue at play here for regulators; which is that they, as a matter of policy, routinely shut retail out of accessing trading/investing opportunities.
They do so based on their criteria of determining whether an individual investor can be considered to be a “sophisticated investor”.
In practice, this really is nothing more than gating retail according to their net worth. Which begs the question:
How does being rich automatically qualify one as financially “sophisticated”?
It might not be so bad a measure if the individual in question is a business owner. Simply because business owners have taken risk, and understand the nature of winning and losing in competitive markets.
Even then, business settings are very different from duking it out in the financial markets, where rational analysis is just a thin veneer of sophistication covering what is underneath, very much a blood sport driven by fear and FOMO.
But if the wealth was simply inherited?
Then the net worth criteria really ceases to be effective. After all, what’s the difference between a rich guy with no experience taking risk with a poor guy with no experience taking risk?
The only plausible reason regulators have to gate by net worth is that rich people can “afford” to lose the money, which does make some sense. Regulators don’t want people to lose such substantial amounts relative to their total assets that they lose their house and can’t afford to eat.
But who’s to say rich people can’t lose all they have and more in markets? It has happened before and it will happen again.
If “sophistication” is to truly be an individual’s understanding of the true nature of markets and how they really function, the criteria for net worth should be set to $0. This is due to the fact that the ones who learn the harshest lessons in the market are the ones who did not survive it.
After all, the saying does go: “There are old traders, and there are bold traders. There are no old and bold traders.”
Of course this means that regulators need to devise a robust way of identifying which of these now considerably poorer, and a lot more disillusioned, ex market folk have actually learned and assimilated the lessons that the market smacked them over the head with.
This is, in fairness to the regulators, extremely difficult to ascertain.
To be continued…
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