WASHINGTON, D.C.— Benjamin Schiffrin, Director of Securities Policy for Better Markets, issued the following statement in connection with Better Markets’ new Fact Sheet entitled “Perpetual Futures Are Inappropriate for Retail Investors, Just Like Single Stock ETFs”:
“Perpetual futures are complex and risky. Yet Kalshi, which recently obtained approval to offer perpetual futures contracts to U.S. investors, describes perpetual futures as ‘simple.’ This is a complete misrepresentation of the nature of perpetual futures.
“Perpetual futures contracts allow traders to speculate by using leverage, which means they control positions worth more than their initial investment. This use of leverage may amplify gains, but it may also aggravate losses. This is what makes perpetual futures so risky.
“Another financial product that uses leverage and that reveals the risks for retail investors is single-stock exchange-traded funds (ETFs). These ETFs track the price of a single stock, but they use leverage to magnify the gains or losses when the stock price goes up or down. Again, the use of leverage can lead to large gains, but it can just as easily lead to large losses.
“The SEC approved single-stock ETFs four years ago. At the time, Commissioner Crenshaw warned that they presented ‘a high level of risk’ for retail investors. Unfortunately, Commissioner Crenshaw proved prescient. Although the name implied that they are simple products, and the promise of high returns lured retail investors in, retail investors suffered large losses in single-stock ETFs because they misunderstood how leveraged funds work.
“Regulators appear poised to make the same mistakes they made with single-stock ETFs as with perpetual futures. Instead of safeguarding retail investors from the risks perpetual futures pose, the CFTC has facilitated their exposure to these risky products. And it has done so without adopting any investor protections, such as disclosure requirements to ensure that investors understand the risks from the use of leverage. Four years after the approval of single-stock ETFs, the regulators who are supposed to protect investors are once again endangering them by approving supposedly simple products that are actually unduly risky.”
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
