A Blog by Jonathan Low


Jul 1, 2012

Losing Faith? Top Securities Regulator Says Americans Don't Trust Stock Market

A financial crisis for which no one has been accused, never mind convicted or jailed. High frequency trading regimens which provide some investors earlier and better information than others. Compensation for an industry that, on average, is more than double what most Americans earn.

The only question is not why Americans are losing faith in the stock market, but why they have not demanded change. The financial services industry remains the largest contributor to political causes (though it has lots of competition from energy and pharmaceuticals)which may explain much of the inaction.

Investors - or former investors - are voting with their fingers and wallets. The number of investors has declined well below the levels seen on the verge of the crisis in 2007. And many of those are choosing to find alternatives, not simply staying out because they were wiped out in the crash.

There is a philosophical debate about whether, once lost, faith can ever be restored. The more pragmatic question is whether an economy can function, let alone attempt to maintain or regain primacy without fully functioning capital markets. The US is now involuntarily conducting an experiment to test that assumption. Dont try this at home. JL

David Levine comments in the Huffington Post:
Americans are losing faith in the stock market, Securities and Exchange Commission chair Mary Schapiro told Congress.

Investors have a "concern about the integrity of the marketplace," and U.S. markets are currently threatened with "an unwillingness [on the part of investors] to ever engage in the markets again,"
Schapiro told a House Oversight subcommittee, during a hearing on the SEC's implementation of the JOBS Act.

People are unsure "whether they're getting accurate and honest information from [companies looking to list on exchanges]," she said, and unsure "whether the market structure itself is tilted against the individial investor and in favor the institutional investor." Schapiro added, "Those are all things we worry about all the time. Because at the end of the day, investor confidence is the oxygen markets survive on, and if we lose it, it is extraordinarily hard to regain it."

Some critics of the current stock market structure reacted to Schapiro's comments pessimistically.

"Our equity market structure has evolved into such a complex system that most investors do not understand the inner workings," said Joseph Saluzzi, founder of institutional brokerage firm Themis Trading. "Confidence is something that will be very difficult to regain but unfortunately, it has already been lost."

Schapiro's comments come just over a week after stock market and trading executives appeared before a Financial Services subcommittee, telling lawmakers that trust in the integrity and fairness of U.S. capital markets has suffered among the general public, particularly in the wake of Nasdaq's botched Facebook IPO in May.

"The public has never been more disconnected [and] has never had less confidence in the underlying mechanism [of the markets]," Duncan Niederauer, CEO of NYSE Euronext, which owns the New York Stock Exchange, said during testimony, according to The Wall Street Journal . "What used to be an investors' market is now thought of as a trader's market."

Schapiro's comments also followed the release of a report last week by financial research and advisory firm Tabb Group indicating that 31 percent of those polled said they had "weak" or "very weak" confidence in the stock market, compared to 15 percent after the May 2010 "flash crash," in which the Dow Jones Industrial Average rapidly dropped 1,000 points in a matter of minutes. That event was later partly attributed to high frequency trading.

The Tabb study also reported that a mere five percent of people surveyed said they have a "very high" confidence in the market, compared to twelve percent in 2010.

One culprit that critics have fingered in explaining people's growing fears over the integrity of the stock market is the increasingly central role high frequency traders are playing in daily market activity. Critics argue that high frequency traders can cause instability in the markets and can distort the price of securities.

Schapiro addressed that concern in Thursday's testimony specifically, saying that after the flash crash, investors exited the stock markets in large numbers "because people said, 'This is not a marketplace for me. I don't have confidence in its integrity.'" Schapiro added, "We know market confidence matters enormously."


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