Should there be stronger financial oversight of stock market trading?
With the covid pandemic leading to another stock market crash in 2020, people are wondering whether stronger financial oversight of stock market trading could help prevent another global financial crisis in the future
Rise of the Issue
The big stock market crashes of the past century – and their subsequent national and global fallouts – continue to leave people wondering if there is anything that can be done to prevent them.
While some people inherently believe in the free market and minimal government regulations, others would rather individuals claim smaller rewards from their investments if it means mitigating the overall risks for the general public. The main debate surrounding stronger financial oversight revolves around whether more accountability and transparency in the stock market could prevent any crashes from happening in the future, or if ever-increasing government interference in the stock market excessively hinders the free market economy it is supposed to protect.
Black Tuesday Kicks Off the Great Depression
The day of the largest sell-of shares in United States history marked the beginning of the great market crash of 1929 which led to the Great Depression.
Securities and Exchange Commission Is Founded
The SEC was created during the height of the Great Depression - considered part of President Roosevelt’s New Deal - to protect investors and maintain fair, orderly and efficient markets.
New York Stock Exchange Introduces Trading Curbs
After the Black Monday stock market crash on Oct. 19, 1987, the NYSE introduced trading curbs or circuit breakers, which either stop trading for a small amount of time or close trading early - allowing stock holders to assess their positions and prevent panic selling which can lead to market crashes.
U.S. Housing Market Collapse Causes Financial Crisis
What started with the housing bubble bursting in the United States and several huge financial players filing for bankruptcy, ended in a global financial crisis - causing private companies and even entire countries to go bankrupt.
Wall Street Reform and Consumer Protection Act
In the aftermath of the financial crisis, legislation was passed to monitor the financial stability of major financial firms, prevent predatory mortgage lending, and restrict how banks can invest.
House Proposes Amending 1934 Securities Exchange Act
The legislation would reform the registration and operation of national securities exchanges, such as ensuring they are not immune from the jurisdiction of United States courts.
Opponents believe there should be minimal government interference in any type of market to ensure free market forces can do their job, while supporters believe it is more important to mitigate risks for the general public.
While one side argues there should be more accountability and transparency for the financial system, the other side worries about the bureaucracy that it will lead to and the subsequent money that it will cost taxpayers.
The two sides have opposing views on whether more financial oversight in the stock market will be able to prevent another major financial crisis.
It will improve the transparency of the financial system.
More reporting requirements will mean the general public as well as regulators will have more insight into the state of financial institutions.
Minimum equity requirements means traders will take less risks.
If a trader is required to put more of their own money into trades, he is less likely to take greater risks - leading to less overall risk in the stock market.
Financial crises due to stock market crashes are less likely.
More requirements and less risk taking means there is less volatility in the stock market, making it less likely for the market to crash entirely.
It will save taxpayer money used for bailouts.
Because of lower risks and more accountability, it is less likely that government bailouts will be necessary - saving a lot of taxpayer money.
It holds traders accountable for their actions.
Increased regulations means traders have to be more wary of their dealings and it holds them accountable in case they make a risky decision that has far-reaching consequences.
It interferes with free market forces.
High levels of government regulations affect the free market - causing some traders to potentially no longer be able to compete in the long run.
It could cause traders to take their money to less regulated countries.
If regulations are too strict and no longer workable for traders, they may choose to invest in other countries - causing capital to leave the United States.
Similar requirements across the board will impact institutions differently.
While some requirements may be easily attainable for larger traders or institutions, others may lack the manpower or structure to fulfill those same requirements, making it more difficult to enter into or stay in the market.
Lobbyists can influence regulations in larger players’ favor.
Larger players often employ the services of lobbyists who influence regulations - which could give them an unfair advantage.
It is costly for regulatory authorities.
If there are more rules and regulations, regulatory authorities have to ensure compliance, which costs a lot of manpower and therefore taxpayer money to execute.