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What Can The Government Do to Stabilize the Market?

Updated on March 15, 2020
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Jack is retired. Before retiring, he worked at IBM for over 28 years. His articles have over 120,000 views.

Introduction

I am not an expert in this field and I do not have any financial degrees or government titles. I am just an average investor with common sense. These recent ups and downs of the stock market and swings of over 1000 points are a sign of instability.

The causes of these instability is worries over the coronavirus and the long term impact on various companies. However, there are a few things that makes this swing worse than necessary.

- March 2020

What Can Government Do?

The government already has a few actions to calm the market. For example, there is automatic trade suspension when the drop is below 7%. However, this is just a temporary pause of 15 minutes. They can also affect the market by adding liquidity to the market, such as buying Treasury notes. They can also, through the Federal Reserve, adjust the interest rates up or down.

As we have seem this past week, all of them are not a cure for this problem.

Here are a few concrete ideas that will reduce volatility. I believe they will have more lasting effect on the stock market and make it better and fairer for all investors.

  • Stop margins - no more borrowing of funds to buy stocks
  • Reduce program trading or eliminate them. The speed of computer trading programs add to the volatility.
  • Stop options trading and shorting of stocks.
  • Minimize day trading
  • any investments vehicle should be open to all investors, no special privileges for the wealthy investor like hedge funds.
  • Allow the market to close for short periods in black swan events, such as 9/11, and the current coronavirus.
  • Do not use interest rates to affect market
  • Do not use QE or print money to affect market

General Principles

I will not get into details of specific policies on controlling the market and reducing volatility. I will state some general principles as they relate to investments and the stock market.

  • The market is a long term investment to raise capital so that public companies can have access to equity to invest and grow.
  • The stock market should strife for fairness, such that all investors large and small would have equal access to all investment vehicles including stocks, mutual funds and hedge funds.
  • No companies should gain advantage by the speed of the network. HFT should be curtailed. There is no reason why the speed in milliseconds should allow a trader to gain an advantage. Just because our technology makes it possible does not mean it is good for the integrity of the system.
  • The market is not a gambling casino. It's main purpose is for investing and not for betting.

My Response to The Defenders of Current Policy

One policy of options trading is explained to me as needed to create efficiency and stability. This argument is never proven but assumed to be true. I challenge that assumption. It is just the opposite. This past two weeks of swings in the market of down 2000 points and up 1200 points of the DOW from day to day is an example of the failure of the current system.

I would suggest eliminating the trade in options for a few months and see the results.

Summary

In this volatile time, our government needs to play a role in helping to stabilize the market and not be an agent of more instability. When in doubt, it is better to slow down or even stop. Allowing trading in a free-fall environment only creates more fear.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Jack Lee

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