The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Soft Spots

The flash crash should be a rallying cry for regulatory reform. That it remains a footnote in the market’s history book is an ominous warning. The lack of transparency in the stock market raises the specter of extreme market volatility that few investors are able to anticipate, and no one can effectively regulate. The flash crash was mostly over in a day. What happens if the next flash crash takes longer to digest? No one really knows. Merging the SEC and CFTC might reduce market volatility by uniformly regulating substantially similar financial products, and insuring someone has a full view of what takes place in the markets.

The futures and stock and options markets are actually the same. This fact has been known—and ignored—for decades. The presidential study of the 1987 stock market crash, the Brady Report, concluded that the market for stocks, options, and futures were actually one market and should be regulated by a single agency. Mary Schapiro, a former CFTC head whom President Obama appointed to head the SEC, has said it is a “basic fact of market dynamics” that much of the price discovery for the stock market occurs in the futures markets. Yet, the SEC and CFTC have different rules, sometimes contradictory, that encourage sophisticated investors to practice “regulatory arbitrage” by playing CFTC and SEC against each other. The lack of a unified regulatory view is the market’s Achilles’ heel. It is widely thought on Wall Street that the markets have become too ...