If federal Finance Minister Jim Flaherty needs another argument in favour of a national securities commission, he need look no further than the latest decision of the Ontario and Quebec securities commissions.
After three years of deliberations, they have approved online trading in derivatives for small retail investors. Individuals who hold accounts with the online trading firm CMC Markets Canada can now deal in Contracts for Difference, or CFDs. These are contracts that allow investors to make leveraged bets — CMC only requires 15 per cent deposits — on the price movements of stocks, indices, commodities, treasuries and foreign exchange. Investors never own the underlying security; they just trade on the price. Because of leveraging, if the price of whatever you’re betting on goes your way, you stand to make big bucks. Of course, if it goes against you, losses will also be magnified.
So what’s wrong with this? CFDs have been available to sophisticated “accredited” investors since 2003. Isn’t it only fair that regulators allow ordinary Joes slaving away over their laptops the same chance to benefit from the miracle of leverage?
To answer that question, let’s first put this latest regulatory brainstorm in the context of the times. We’ve just begun to emerge from the worst recession since Joanie fell in love with Chachi, a downturn, lest we forget, that was spawned by the U.S. sub-prime mortgage crisis.
That was, at heart, a story of excessive lending that produced an unmanageable amount of leverage — too much debt in relation to home equity — a condition that worsened as interest rates crept up and housing prices fell.
The mess was compounded as the mortgage loans were securitized in ever more opaque financial products and sold to investors around the world. Individual homeowners got in over their heads, but so did sophisticated investors — large funds and corporations — that ended up having no idea about the quality of the securities they were buying.
There may be individual online trading geniuses who can do better than those big institutional investors, but I doubt it. Day traders very often lack fundamental investment knowledge. In fact, they like to trade on price movement alone, so having an understanding of the actual investment only gets in the way. You get this crowd hooked on leveraged investments and many shirts will be lost.
Once again, provincial securities regulators have let down the public. Let’s hope a future national body won’t do the same.
