I believe that the complexity of Leveraged ETFs is correctly matched with the current required notice and acknowledgement. Further restrictions on these products are very likely to be unfair to everyday Americans. Retail investors can and should be able to choose the level of risk and volatility that matches their investment knowledge and interest without needing to be already experienced or wealthy.
Creating additional hoops to jump through is not the same thing as protecting investors.
You’re going to get comments saying that the current restrictions on options trading are not effective. This is in part true but also misleading in my opinion. First many of the people saying this have not tried to get access from scratch recently. They already have the money and experience to get approvals with ease. Second, the current requirements punish those who answer honestly. No one wants to admit they lied so it leads to this false sense that it’s easy to get approved. If you answer honestly you end up like me trying to slowly boot strap your way to so-called higher tiers for no logical reason.
In order, to trade with what one of my brokers considers are more complex option spreads, I need to first trade enough simpler options to show my experience. This is such a bad system because I may not want to take the additional risk of the simpler options (single leg) or accept poor returns on others (simple covered call strategies largely underperform in back tests and it takes quite a bit of additional knowledge to use them effectively). What this means is that I’m in a catch 22 where I can’t trade the strategies, I am knowledgeable about because I won’t trade strategies that don’t align with my portfolio goals.
For example, one of my brokers has their lowest tier setup such that you can only sell covered calls. That’s it. I don’t want to do that though and they would not approve me for the next tier up without experience. I solved this by going to another broker, and then I came back later with more experience, but this is not a good solution. In some cases, I don’t have a choice to just go to another broker. For example, my 401k can’t just be moved to another broker. Which is to say the current system is too easy to cheat and too hard to pass legitimately.
The idea that the current options approval system or anything remotely resembling it could be applied to leveraged ETFs is very frustrating. The logical conclusion to trying and failing to come up with a fair solution may be to conclude that no such solution exists. The current level system for options approval is very unfair and I think the logical conclusion is that no sufficiently good improvement exists.
If additional regulation does continue to be considered, I have some opinions on guiding principles.
First, I don’t think regulation should discriminate against investors with low incomes or low net worth. *You’re poor so you can’t trade* is very repulsive and unfair, and yet that’s exactly what the current system for options trading approval does.
Second, experience shouldn’t be a circular dependency. If I can’t get experience without approval and I can’t get approval without experience, then the system is broken. From what I’ve seen brokers either want to know how many years or how much volume of trades you’ve done. Nevermind that the most poorly informed investor could have traded a long time ago and also traded a large amount very poorly. I’ve actually considered if I should just “lose some money” to increase my “experience.” I haven’t done it but it would be the logical way to increase my so-called experience. Irrelevant gate keeping isn’t fair, it’s harmful.
Finally, honesty should be rewarded. The system for options approval is designed for dishonesty. It’s very telling when the questions don’t have clear answers. For instance, I was asked for a dollar amount for how much options trading I had done, but the broker didn’t even know how I should calculate that. Is it based on how much I pay for the contracts (that could be zero in some cases)? They weren’t sure, and I guess you’re just supposed to make something up, and that’s pretty much what they told me to do, when I spoke with them.
Leveraged ETFs are not inverse ETFs and they aren’t options. These things aren’t the same or the same level of complexity. The current notice on leveraged ETFs is working in my opinion and does not need to be fixed. Applying additional requirements to leveraged ETFs would likely harm everyday people while not meaningfully impacting well-resourced traders.
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Peter Andrien Comment On Regulatory Notice 22-08
I believe that the complexity of Leveraged ETFs is correctly matched with the current required notice and acknowledgement. Further restrictions on these products are very likely to be unfair to everyday Americans. Retail investors can and should be able to choose the level of risk and volatility that matches their investment knowledge and interest without needing to be already experienced or wealthy.
Creating additional hoops to jump through is not the same thing as protecting investors.
You’re going to get comments saying that the current restrictions on options trading are not effective. This is in part true but also misleading in my opinion. First many of the people saying this have not tried to get access from scratch recently. They already have the money and experience to get approvals with ease. Second, the current requirements punish those who answer honestly. No one wants to admit they lied so it leads to this false sense that it’s easy to get approved. If you answer honestly you end up like me trying to slowly boot strap your way to so-called higher tiers for no logical reason.
In order, to trade with what one of my brokers considers are more complex option spreads, I need to first trade enough simpler options to show my experience. This is such a bad system because I may not want to take the additional risk of the simpler options (single leg) or accept poor returns on others (simple covered call strategies largely underperform in back tests and it takes quite a bit of additional knowledge to use them effectively). What this means is that I’m in a catch 22 where I can’t trade the strategies, I am knowledgeable about because I won’t trade strategies that don’t align with my portfolio goals.
For example, one of my brokers has their lowest tier setup such that you can only sell covered calls. That’s it. I don’t want to do that though and they would not approve me for the next tier up without experience. I solved this by going to another broker, and then I came back later with more experience, but this is not a good solution. In some cases, I don’t have a choice to just go to another broker. For example, my 401k can’t just be moved to another broker. Which is to say the current system is too easy to cheat and too hard to pass legitimately.
The idea that the current options approval system or anything remotely resembling it could be applied to leveraged ETFs is very frustrating. The logical conclusion to trying and failing to come up with a fair solution may be to conclude that no such solution exists. The current level system for options approval is very unfair and I think the logical conclusion is that no sufficiently good improvement exists.
If additional regulation does continue to be considered, I have some opinions on guiding principles.
First, I don’t think regulation should discriminate against investors with low incomes or low net worth. *You’re poor so you can’t trade* is very repulsive and unfair, and yet that’s exactly what the current system for options trading approval does.
Second, experience shouldn’t be a circular dependency. If I can’t get experience without approval and I can’t get approval without experience, then the system is broken. From what I’ve seen brokers either want to know how many years or how much volume of trades you’ve done. Nevermind that the most poorly informed investor could have traded a long time ago and also traded a large amount very poorly. I’ve actually considered if I should just “lose some money” to increase my “experience.” I haven’t done it but it would be the logical way to increase my so-called experience. Irrelevant gate keeping isn’t fair, it’s harmful.
Finally, honesty should be rewarded. The system for options approval is designed for dishonesty. It’s very telling when the questions don’t have clear answers. For instance, I was asked for a dollar amount for how much options trading I had done, but the broker didn’t even know how I should calculate that. Is it based on how much I pay for the contracts (that could be zero in some cases)? They weren’t sure, and I guess you’re just supposed to make something up, and that’s pretty much what they told me to do, when I spoke with them.
Leveraged ETFs are not inverse ETFs and they aren’t options. These things aren’t the same or the same level of complexity. The current notice on leveraged ETFs is working in my opinion and does not need to be fixed. Applying additional requirements to leveraged ETFs would likely harm everyday people while not meaningfully impacting well-resourced traders.