A Democratic commissioner at the U.S. Securities and Exchange Commission on Friday questioned the growing use of complex financial products by retail investors such as derivatives based on stock market volatility indicators that were linked to recent weeks of market turmoil.
Commissioner Kara Stein questioned whether retail investors are taking risks with complicated financial products that they cannot even appreciate. In remarks prepared for the "SEC Speaks" conference in Washington, she cited the wild price swings in recent weeks of the VIX and products that attempt to track that gauge of future stock market volatility.
"The question should be...not can we create complex and esoteric products, but should we?" she said.
Dramatic swings in the stock market in recent weeks saw some volatility products derived from VIX drastically lose their value, driving firms to cancel some of those products or restrict investor access.
Stein warned that it is easier than ever for average investors to gain access to incredibly complicated products, and even heightened disclosure does not guaranteed investors appreciate those risks.
"What concerns me is the disconnect between what investors actually understand and what they really need to understand in order to have a fighting chance at using these products the way they are designed to be used," she said.
Stein said the SEC has seen "abuses relating to the purchase and sale of complex products," and is bringing enforcement actions along those lines. But she called on private parties, including exchanges and industry professionals, to do more to ensure the average investor is not investing in financial products they do not understand.
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