It is my fear that markets, increasingly under the control of machines and robot-like investment managers, have become more susceptible to panic selling. I doubt that HFTs would step into the gap, as did Morgan, Durant, Shopkorn, Mnuchin, and Buffett in years prior. In the two decades following World War II, 90% of all stocks were owned individually by households. By 1960, half of all households had some stock ownership. They had become capitalists and took pride in their investments. To own a “piece of America” was not only a slogan; it reflected an aspiration. By definition, investing in stocks for the long term requires confidence in the future – a critical ingredient to building economic growth. Today, individual households own less than 25% of all shares, and investors are disparaged as one-percenters. It is true that more than half of households own shares through mutual funds and various retirement plans, but those represent multiple degrees of separation. The number of publically traded stocks has shrunk by 30% since 2000, in part because of costs of complying with government regulations. In the meantime, the Obama Administration, with its focus on inequality, has had a tendency to downplay the importance of equity investments and savings, preferring the political expediency of dividing the people into capitalists and non-capitalists.
One could argue that the market may be rigged, but the more important message is that such voices detract from the far more critical fact that the impersonal nature of investing today, the utilization of markets as casinos by algorithmically programmed computers, the speed with which orders reach exchanges and with-holding periods measured in milliseconds, and the demonization of capitalism by politicians are destroying confidence, damaging economic growth and denigrating the concept of savings.
Here is a link to the full report.
As I argued in Crowd Money, the raison d’etre of markets is to promote capital formation. The first principle of regulation should therefore be to ensure that anything which promotes this aim is permissible and anything that acts contrary to it should be heavily controlled.
The speed with which technology develops often leaves regulators scrambling to understand the developing market environment which leaves a window for intermediaries to benefit. That window now appears to be closing for high frequency traders, most dependent on front running. The ability of such strategies to provide liquidity more effectively than other sources will probably be more important to their survival as the industry evolves.
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