Unequal Investment: A Regulatory Case Study

Growing economic inequality in the United States has reduced social mobility, placing financial security farther out of reach for a growing number of Americans. During the COVID-19 pandemic, U.S. stock prices have grown simultaneously with unemployment and food insecurity, highlighting the fact that prosperity is unequally distributed in the U.S. economy. Many Americans do not benefit when the stock market soars because they do not have the means to invest. However, even ordinary American families who do have wealth to invest in the capital markets will face enormous obstacles in narrowing the wealth divide through investment. This is because ordinary American investors regularly earn a lower rate of return from investing than their wealthy counterparts. Wealthy investors are growing a larger mass of wealth at a faster rate of return, making it virtually impossible for ordinary investors to catch up. The disparity in rate of return is the result of both regulation and practicalities that limit the investment options of ordinary investors. Scholars have long acknowledged this disparity in investment opportunities, and many have proposed lifting regulatory barriers to expand investment access for ordinary investors. This Article offers a new perspective, focusing on the other side of the wealth divide. That is, perhaps wealthy investors have too many investment opportunities. Examining the regulation of short selling as a case study, this Article demonstrates how regulators have different motivations when regulating ordinary investments—like retirement savings—as opposed to exclusive investments—like short selling. This bifurcated regulation exacerbates the capital markets’ contributions to economic inequality by favoring the expansion of the markets, and thereby facilitating disparities in rates of return. This Article argues that regulators should re-examine the “more is better” presumption in capital markets regulation in light of the fact that additional exclusive investment opportunities fuel the wealth divide