Man vs. Machine

Investors Lack Confidence in Regulators to Fix Markets

Key Points

Eighty-six percent of respondents view the market as unfair to small investors. 

Half of respondents have little or no confidence in regulators to make the market fair for investors.

Nearly five months after the May 6 Flash Crash, many individual investors see the stock market as rigged, and they have little confidence in regulators to fix it.

Oliver Quilla for

In a new CNBC/Associated Press poll, 86 percent of the 1,035 respondents view the market as unfair to small investors. The same majority, though, say the market is fair to big investment banks, hedge funds and professional traders.

Half the investors polled have little or no confidence in the ability of regulators to make the market fair for all investors. Just 8 percent had a high level of confidence in regulators. The majority also say they are less confident in investing in individual stocks, and they blame market volatility.

Some Wall Street professionals point to high-speed computerized trading and a fragmented market structure, combined with thin market volume, as factors behind the volatility—and the Flash Crash. That day, the Dow skidded nearly 1,000 pointsin just a half hour. The event, which drove some stocks to zero, resulted in thousands of broken trades and created a new sense among investors that regulators had lost control of the marketplace.

Yet, the individual investors in the survey cited the weak economy and negative corporate news as greater reasons for market volatility than computerized trading.

For its part, the Securities and Exchange Commission is expected to releasea report on the crash this month, and has issued new temporary rules that provide circuit breakers for individual stocks. The agency has so far failed to pinpoint a specific cause for the crash.

In the months after the Flash Crash, there has been new scrutiny of high-frequency traders and their potential role in market volatility. Those firms, which use high powered computers to send rapid-fire buy and sell orders, have said they provide liquidity to the market place, and they now account for 56 percent of market volume, according to Tabb Group. Individuals account for just 11 percent of the volume in a market that has seen trading volume shrink by 30 percent, from this time last year.

Investors Wary of Stock Trading

The industry received a black eye this week when the Financial Industry Regulatory Authority censured and fined New York-based Trillium Brokerage Services and 11 employees $2.26 million for a high-frequency trading strategy it described as illicit. It alleged the firm's traders entered numerous and layered non-bona fide orders to generate selling or buying interest in specific stocks, creating the appearance of legitimate order flow.

In the CNBC/AP poll, 38 percent of the investors didn't see the trend to automatic, computerized trading as either a positive or a negative. Another 35 percent see it as somewhat good or positive, and 28 percent see it as somewhat bad thing or even negative.

While 61 percent said they were less confident about investing in individual stocks, another 37 percent saw the volatility as having no bearing on their confidence level.

However, 48 percent of the investors still believe individual stocks are a somewhat good or very good way to make money, and 78 percent say the best way to make money in the stock market is buy and hold.

Those investors prefer holding stocks for a long time, and taking profits only after the price rises a lot, as opposed to another 21 percent who favor shorter term buying and selling to take advantage of smaller changes in price. (See the full poll results here.)

Many market pundits had expected individuals investors to lose faith in "buy and hold" investing after the financial crisis sent them fleeing the stock market. Stocks have risen more than 60 percent from the March, 2009 lows, but the Dow and S&P 500 are still more than 25 percent below their 2007 highs.

Forty-eight percent of those polled said researching stocks carefully pays off, and it is possible to make good returns. But 39 percent say investing in stocks is like gambling, and more luck than skill is required.

The majority of investors rated mutual funds as a preferred way to increase wealth, with 62 percent saying they are a very good or somewhat good vehicle for investment. Fifty-one percent favored a savings account at a bank, and 50 percent voted for both bonds and real estate as somewhat or very good ways to grow wealth.

Interestingly, investors were more ambivalent about exchange-traded funds, which 52 percent see as neither a good or bad way to make money. Just 26 percent favor them as a somewhat or very good way to increase wealth.

The poll was conducted between August 26 and September 8. The margin of error in the survey is plus or minus 3.9 percent.