NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Rawley Z. Heimer

Boston College, Carroll School ofManagement

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Institutional Affiliation: Boston College

NBER Working Papers and Publications

December 2017Should Retail Investors' Leverage Be Limited?
with Alp Simsek: w24176
Does the provision of leverage to retail traders improve market quality or facilitate socially inefficient speculation that enriches financial intermediaries? We evaluate the effects of 2010 regulations that cap leverage in the U.S. retail foreign exchange market. Using three unique data sets and a difference-in-differences approach, we document that the leverage-constraint reduces trading volume by 23%, alleviates high-leverage traders’ losses by 40%, and reduces brokerages’ operating capital by 25%. Yet, the policy does not affect the relative bid-ask prices charged by the brokerages. These results suggest the policy improves belief-neutral social welfare without reducing market liquidity.

Published: Rawley Heimer & Alp Simsek, 2018. "Should Retail Investors’ Leverage Be Limited?," Journal of Financial Economics, .

 
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