March 13, 2020
I have been using Rydex, Proshares and Prudent Bear leveraged and reverse funds for 17 years. I have used them both as a straight investment and as a hedge.
I know the risks of both leverage and trading on the short side. They are my risks and as my own agent I do not need any other agent to intervene on my behalf.
While regulations are necessary to maintain the integrity of markets and to prevent them being manipulated, I dont see that happening in money markets where the interest rate has constantly been manipulated for more than 2 decades by the Federal Reserve and every other central banker worldwide.
It was not thought necessary to put a stop to High Frequency trading which is more or less high speed insider trading. We were told that the HFTs provided liquidity, except they did not when it was actually needed. Yet the HFTs have been allowed to thrive despite the fact that they damage the integrity of the market by giving advantage to those who pay a lot to the exchanges for the proximity that gives the latency advantage.
Why then should you think that leveraged and inverse funds should be treated differently to any other fund or security? It would mark a significant and unjustified change to the SECs role in regulation over many decades.
While I accept that there is no market today that is free in the sense of being entirely unregulated, this type of regulation goes against the whole grain of freedom to make ones own investment decisions.
This proposed regulation would be a distinct discrimination against a fund which is leveraged. The whole market is leveraged when you take trading on margin into consideration. Why, therefore, should a leveraged fund investment require this sort of oversight? I certainly do not need a 3rd party examining my adequacy to trade or to even prevent me from trading with my preferred funds.
This proposed regulation would be a distinct discrimination against short trading. With much reduced short trading (which is the likely outcome of this proposal), the major function of the market, which is price discovery, would be much diminished. The short side is very important for providing a check on market falls because a short trader has to buy back to close a trade. The short traders are the ultimate supporters of the market. Reverse funds help to provide the overall integrity of the market.
Why has this regulation been proposed? What do you know that we dont or what do you fear? Are you anxious about being sued because the markets no longer have the integrity that they once had? The sheer weight of money from Government and Federal Reserve manipulations via bailouts and Quantitive Easing has never managed to prevent selloffs from time to time.
As always, timing is everything and the risk of getting the timing wrong is the same for all market participants. Trying to protect the one sector of traders, which is small and specialised and most likely more experienced than the regular long trade, seems a strange action on the part of the SEC. It suggests an ulterior motive. At a guess, that motive would be to get the short traders out of the market. That would be an incredibly foolish idea and help to create a very one-sided and dangerous market.