MIT Golub Center for Finance and Policy
Finance
Should Retail Investors' Leverage Be Limited
By
Abstract
Does the provision of leverage to retail traders improve market quality or facilitate socially inefficientspeculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that capleverage 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 percent,alleviates high-leverage traders’ losses by 40 percent, and reduces brokerages’ operating capital by 25percent. 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.
Authors
- Alp Simsek
- MIT
- Rawley Z. Heimer
- Boston College
