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Should retail investors’ leverage be limited?

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  • Heimer, Rawley
  • Simsek, Alp

Abstract

Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage-constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.

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  • Heimer, Rawley & Simsek, Alp, 2019. "Should retail investors’ leverage be limited?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 1-21.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:3:p:1-21
    DOI: 10.1016/j.jfineco.2018.10.017
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    More about this item

    Keywords

    Leverage restriction policy; Foreign exchange market; Retail trading; Speculation; Consumer financial protection;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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