The purpose of our stock market used to be to facilitate new capital formation. A growing company could raise money to hire workers and invest in its future by going public on an exchange, where long-term investors could interact in a fair secondary market. That fair secondary market gave confidence to seed investors that they could monetize their investments, and encourage them to continue to seed young companies.
Who has been hiring Americans in the last 10 years: smaller young businesses or large multinationals and financials?
Until fairly recently, our major stock exchanges were run like utilities. Rules were in place that honored things like price-time priority, and rules of engagement. This is no longer the case, as you all know. For-profit exchanges are really misnamed server farms, whose real business is providing collocation front-running and server-servicing to a class of locust market participants who savage and pillage investors.
Our regulators enable them. The recent Limit Up Limit Down proposal sits waiting approval sixteen months after the flash crash. It was written by the for-profit exchanges and handed to the SEC. A study by Nanex actually demonstrates that LULD would not have even prevented the Flash Crash of May 6th, and might have even made it worse! Amazing isn’t it?
Prior to May 6th 2010 we were a lonely voice of criticism of the conflicted rats-nest that is our equity market. “Respected” consultants branded us luddites, who would have us all go back to quarter spreads and rotary phones. Since May 6th, we have been honored to see many respected and important market leaders take up our call to right our course. In the recent past we have highlighted viewpoints for you from the Najarian Brothers, Zerohedge, Alphaville, Jim Cramer, as well as seasoned academics. Today we want to highlight a particularly excellent editorial written by Doug Kass yesterday afternoon. The link to it is here: The Newest Financial Weapons of Mass Destruction. It is a most excellent read.
Some teaser quotes:
- Meanwhile the SEC fiddles while the New York Stock Exchange and investors burn. I suppose one important reason why the SEC is hopelessly unresponsive is that they are literally “paid off” by the high-frequency-trading industry and its lobbying efforts have likely retarded regulatory responses.
– The toxic combination of price momentum-based high-frequency trading strategies and the proliferation of leveraged ETFs has served to launch the newest forms of financial weapons of mass destruction, and they’re alienating legions of investors.
– Their influence (on the market’s volatility) is contributing to the negative feedback loop that is threatening our domestic economy’s growth trajectory.
– Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion (in the same period, $835 billion of fixed-income funds have been purchased! (Hat tip Steve)).That spread between stock outflows and bond inflows — $1.235 trillion — is unprecedented in the annals of financial history.
– Nevertheless, time is running out to stop the damage in investor confidence.
One can only hope that the SEC recognizes that the damage being done to our markets is permanent. One can only hope they realize that listening to the lobbyists, and the bought Congressional Leadership in the House Financial Committee, will accelerate the decline of our capital raising system. One can only hope that the SEC realizes that we need them to be fearless in their stance against the conflicted lobbyists and insiders who have wrecked our markets, and should not be allowed to make the rules that allegedly remedy them.
Doug Kass’s editorial is excellent. The linkage between the stock market and economic growth is broken. Appointed and Elected Leadership needs to understand that.