Casino-Type Stock Market Is Deterring Investors: Broker
Trading volumes for stocks have decreased since 2008 and a series of high profile glitches have continued to hurt investor confidence. On Tuesday, erroneous trades led to a spike in a number of U.S.-listed stocks including Pandora Media and Nokia.
Seth Merrin, CEO of Liquidnet, an electronic stock-trading broker, said that belief in the markets is the number one concern among regulators and exchanges around the world today.
“You have people looking at the stock market and calling it a crapshoot or a casino, it’s just about a lack of investor confidence,” he told CNBC Tuesday.
Liquidnet, which operates so-called “dark pools,” or off-exchange trading, has also been hurt by the drop in equities volumes, with Reuters reporting last month that the company had laid off around 15 percent of its workforce.
“To get investors back in the market they have to believe, whether it’s through IPOs or high frequency trading, they have to believe that it’s not rigged against them,” Merrin said, adding that every regulation, whether passed or proposed, should make sure that it aims to instill confidence.
High-frequency trading (HFT), which uses software to post trades in microseconds, has been blamed for a number of glitches on global stock markets over recent months.
Examples include the computer malfunction at Knight Capital Group which lost $440 million, the FacebookIPO where stocks traded well below their initial asking price and more recently in India where a “flash crash” wiped nearly $60 billion off the Indian stock index.
“All of these systems are gearing up so that they can shave one millisecond off the timing, or handling the massive amounts of traffic that high-frequency traders use. High-frequency trading has nothing to do with investing,” Merrin said.
The problems haven’t gone unnoticed by policymakers, with the European Parliament voting in Septemberto unanimously introduce sweeping reforms of the securities markets, putting curbs on firms that use HFT.
The worry for Merrin is that businesses can no longer use the stock market to raise capital and fund their expansion as they once did.
“In the United States alone I think $150 billion has been pulled out of the equity markets,” he said. “They’re taking money out of the system and we have a backlog of about 200 IPOs in the United States.”
Peter Toogood, investment services director at OBSR, echoed Merrin’s comments.
“It’s got nothing to do with the traditional role of equity raising and organic growth,” he told CNBC Tuesday. “Everybody has worked out that IPOs are primarily to make management feel richer. They don’t really help anyone. And things like Facebook, quite frankly, are an offence because they should never have listed.”
—By CNBC.com’s Matt Clinch