Why It Sucks To Be A Retail Broker Now Part 2
Unfortunately for retail brokers, the situation does not get any better even if they were to argue for placing trading restrictions out of fiduciary duty, because regardless of intent or how presumptuous such arguments are, retail will still lose money when this blows up.
And when that happens en masse and unfortunate individual investors find out that they have lost more money than they deposited – What?! How?! Because of leverage! – retail brokers will become public enemy number one with a massive target on their back. Regulators will hound them, and retail investors will vilify them on social media. Also, since it has been in vogue over the past few years, it wouldn’t be surprising if politicians decide to haul CEOs of these brokerages up to Capitol Hill for a very public and international dressing down.
Adding to the frustration for retail brokers is the fact that the Reddit rampage of 2021 is actually very good for their businesses! If they didn’t have regulators breathing down their necks, it is likely that these firms will give retail exactly what they want; continued access to normal levels of leverage and continued unrestricted trading in the most volatile names. After all, they make money on volume, and for them nothing is higher volume than retail fueled BubbleMania.
Of course, prudent retail brokerage CEOs would not run their businesses in such a way even if they could, simply because doing so puts the reputation of their firms on the line, while also running the substantial risk of bankruptcy. But unfortunately in financial markets there are always people and/or firms willing to risk it all for a larger bonus check, consequences to themselves and everybody else be damned.
Finally, let’s consider the socioeconomic circumstances that serve as the backdrop for this entire saga. There has, to date, been a decade of QE in the USA, which has gotten the market high on pure belief, and Covid lockdowns which have destroyed the labor market, rendering retail investors unable to earn an income. All of this while the richer equity owning folk earned even fatter returns from the stock market, contributing to even higher levels of inequality.
In this environment, it doesn’t matter that the vast majority of retail investors do not understand the risks of their own actions. Current or future trading restrictions, as well as possible future regulatory action to prevent a repeat of this saga will be seen by retail investors as being told that they can’t get rich because only rich people can get richer. Considering their already seething sense of injustice…How could they not get mad?
Pity the retail brokers, they really are damned if they do and damned if they don’t.
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