Why does the government regulate the stock market and how does it do so? Isaella Cha

Reasons for Regulation

Why Regulation is Needed

In order to maintain a healthy stock market, investors need be fully informed about the market situation. Moreover, the markets should not be manipulated by insiders. Investors could be tricked into making harmful choices if the market is corrupted and unclean, and this would disincentivize other people from investing in stocks. At worst, it could lead to a collapse or a serious recession in the stock market. This is why the government regulation is needed. In an unregulated market, investors may not have enough information to guide their investments, as companies can try to hide about information about themselves or others that is not already known in the entire public. Although the exact reason differs from country to country, in general, the government regulates the stock market in order to make them more stable and improve the way they work.

Main goals of financial (stock market) regulatory bodies:

For most governments around the world, the main goals of their financial (stock market) regulatory bodies are to prevent:

  • Insider trading- Insiders invest in stocks based on information that has not been revealed to the public. Anyone who comes across inside information through any means and then trades upon it can be found guilty of insider trading.
  • Spreading false information
  • Accounting fraud- involves an employee, account or corporation itself and is misleading to investor and shareholders.
  • Market manipulation
  • Collusion- secret or illegal cooperation or conspiracy in order to deceive investors
  • Breach of fiduciary duty- a fiduciary duty is an obligation to act in the best interest of another party. For instance, a corporation's board member has a fiduciary duty to the shareholders.

Case Study: China

For different governments, the reasons for regulations may vary. The Chinese government regulates stock to maintain political credibility among investors. They want to keep up their economic growth, and they feel like a decrease in stock prices will discourage investors. In January 2016, the Chinese stock market experienced 7% crash because many stakeholders sold their shares. The government responded by banning the key stakeholders from selling their shares, threatened to arrest people who spoke of economic recession, and spent huge sums of money to raise stock prices. The government released $500 billion to China Securities Finance to buy shares and keep the market stable.

In addition, in March 2017, A Chinese fund manager was ordered by the China Securities Regulatory Commission's (CSRC) to pay $36.3 million for “using the link between the Shanghai and Hong Kong exchanges to manipulate a Shanghai-listed stock”. Manipulating stock prices is a serious crime in any country. China began "investigating various aspects" of the stock market in response to "Chinese stock market crash". People who break the law and cause abnormal market functioning can be fined hefty amounts of money.

Methods of Regulation

Government Agencies

The government agency that oversees and enforces regulation differs for every nation.

In the United States, the government body is the Securities and Exchange Commission (SEC). Its primary mission is to monitor and enforce laws created to govern the existence of securities and other related assets in the United States. It "licenses every exchange in the U.S., from main exchanges like the New York Stock Exchange and NASDAQ to the Chicago Stock Exchange, National Stock Exchange, and other minor markets". The US Securities and Exchange Commission works to ensure that laws under the Securities Act of 1933 are enforced.

Securities and Exchange Commission

Hungary

Central Bank of Hungary

China

China Securities Regulatory Commission

Korea

Financial Superviory Service

Government Policy

In general, governments say that they don't control the stock market. However, the policies they make have a significant impact on the stock market, whether directly or indirectly.

Fiscal Policy

Fiscal policy is changes in government spending and taxes and to fight recessions or inflations. Government spending and taxation can influence the economy because it changes the supply and demand balance. During a recession, the government increase its level of spending and/or reduce taxes. Tax cuts and government spending can stimulate the stock market and could encourage investors to invest in stocks.

Monetary Policy

Monetary Policy is changes in money supply to fight recessions or inflations. The ultimate goal of monetary policy is to maximize employment, stabilize prices, and moderate long term interest rates. Monetary policy is created through the actions of the central bank on the money supply and interest rates. It works to either create a business friendly economy to spur employment and growth, or a policy to reduce national spending to try to lower the inflation rate.

India: Case Study

In India, the 2013 Prime Minister elections influenced a lot of investors to invest in S&P Bombay Stock Exchange Sensitive Index (India's market index). During the course of the elections, Modi, the prime minister candidate, called for development at the highest pace possible. He put forth policies such as Make in India, Startup India, Goods and services tax bill, and Bankruptcy code stimulated the market to grow.

Works Cited

  1. Balding, Christopher. "Can the Chinese Government Control the Stock Market?" CNN. Cable News Network, 28 July 2015. Web. 09 Apr. 2017.
  2. "China's Regulator Levies Hefty Fines for Stock Market Manipulation | Finance Magnates." Finance Magnates | Financial and Business News. Finance Magnates, 13 Mar. 2017. Web. 09 Apr. 2017.
  3. "What We Do." SEC Emblem. N.p., 10 June 2013. Web. 09 Apr. 2017.
  4. “How the U.S. Stock Markets Are Regulated.” InvestorGuide, www.investorguide.com/article/11616/how-the-u-s-stock-markets-are-regulated-igu/. Accessed 9 Apr. 2017.
  5. “Election Results Boost India Stocks to Another Record High.” CNNMoney, Cable News Network, money.cnn.com/2014/05/16/investing/india-election-stocks/. Accessed 9 Apr. 2017.
Created By
Woojung Cha
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