At the margin -- Change is in order

It definitely is not the idea but the implementation -- poor implementation.

We already discussed Hedge Fund and the qualified investor whose money can grow at Hedge Fund rates but not the common man's $. The underlying principal is not a bad idea. It is meant to mitigate greed so someone does not loose their shirt betting everything they own on highly risky
investment vehicles such as Hedge Fund.

Let us look at futures today. An agreement to buy a harvest or product of mining etc at a future date for a fixed price is an excellent risk transfer mechanism. The forward contract as they are called is beneficial to the producer eliminating the uncertainty. The standardized version of the forward traded by exchanges also known as futures is a notable innovation and makes the asset
class fungible. Increases commerce.

All of them rely on the notion of margin. Regulation T as it is known. This regulation allows people to borrow money and buy assets or borrow assets and sell (shorting), reducing the capital burden. Also allows ordinary people to leverage their finances and prosper faster.

The case against the margin is that it is susceptible for abuse and facilitates speculation.
This can however be overcome by a slight modification of the Regulation T. Current regulation works by fixed percentage without regard to the volume. 50% initial margin for equities. What if Regulation T is modified such that increasing amounts of capital is required to sell short larger volume. This can be stipulated by % ADV (percentage average daily volume). Less than 1% ADV current Regulation T holds.
And stipulate a ladder where at some %ADV say 5% one would have to maintain 100% margin.

This can be parameterized in three different ways -- security level, account level and market level --. %ADV is parameterization at the security level as ADV varies by security.
In addition, margin transaction above 25% ADV in aggregate for a given security.
Account level restriction may be that no single account may transact on a margin basis beyond a certain % ADV. That limit may be 0.5%. The limit must allow everyone to engage in short selling but no single individual or entity to abuse the system.
Aggregate Limit (or a variation of the same) cited above will serve to regulate market wide in the aggregate.

This will reduce pump and dump behavior and unchecked speculation. I certainly do not fully subscribe to the view that current oil prices are the result of speculators in the futures market.

Until next time! Bye!