Read on Twitter
Good regulation is designed so that your stupidity doesn't wreck the system. So if you want to knock yourself out trading stuff, go ahead, but the system must protect the brokerage firm. Why? Because holdings aren't typically, so if the broker were to fail, you are a creditor
That's of course a gross oversimplification. Much regulation doesn't adhere to that "stupidity" standard. Rather than protecting the system, much well-intended regulation aims to prevent you from making what a regulator deems to be a stupid decision in the first place.
it goes beyond the scope of what can be said in a tweet, but let's just say reasonable people can disagree on the specifics of regulations that micro-manage activity.
What folks usually agree on is that protecting the system as a whole is important - so-called financial stability
What folks usually agree on is that protecting the system as a whole is important - so-called financial stability
But even that's not trivial. Because in an effort to "protect the system", it's easy enough to create a 'Greenspan put' - if financial institutions always get bailed out, it creates distortions that can create seeds for future disasters.
The "solution" is to keep it simple - collateral for leveraged transactions, marking positions to market on a continuous basis is a principle that would prevent many crisis.
So the system "protects" the brokerage firm - and the blogosphere explodes. What's happening here? Brokerage firms are subject to many rules, notably also capital requirements. If we don't want these firms to fail, they need to not just monitor their capital requirements,
but also take action to prevent capital short-falls. The most obvious ways to address these is to reduce activity that threatens their capital ratios; and to raise capital. If someone has link to explain capital requirements for brokerage firms in plain English, pls post
The lack of understanding about rules is fertile ground for conspiracy theories. Which, in turn gets me back to my earlier point: keep rules simple.
In any case, part of the reason the large get larger is because of episodes we are experiencing right now. I wouldn't be surprised to see some brokerage firms be gobbled up by larger ones with larger, stronger balance sheets.
In some ways, that's a pity. The current social media frenzy on stocks increases barriers to entry for new brokerage firms - rather than 'democratizing' investing, it does quite the opposite.
There's another side to the coin: in an effort to protect investors, industry professionals are regulated in many ways, including their speech. When I tweet, I am held responsible by my compliance, my regulator (I'm not a broker, but am subject to other financial regulators)
More so, the regulations aren't a checkbox of things you are allowed to do, so everyone has a slightly different interpretation. That's a friendly way of saying many professionals on social media take a most liberal interpretation of the rules.
The reason regulators regulate speech of investment professionals is because they deem it advertising. At least some regulators don't like to micro-manage, and they are also learning about social media, so they have had a habit of only pursuing egregious violations.
One bucket that's in the egregious category are pump and dump schemes, https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes. This is illegal for anyone , not just investment professionals, but I would expect some enforcement action of investment professionals participating in these reddit chat rooms.
Also note we have a new sheriff in town as the SEC gets new leadership with the new administration. Social media is essentially begging to be whacked with enforcement actions and new rules.
