Retail Investors Don’t Trust the Market: McCaughan

Investors withdrew more than $33 billion from domestic stock market mutual funds so far this year, and Jim McCaughan, CEO of Principal Global Investors, said this is a sign retail investors are losing faith in the game.

“We look after millions of people’s 401(k)s, and we want to be able to look them in the eye and say the market is fair, and I’m telling you unfortunately at the moment it’s quite difficult to do that,” McCaughan told CNBC Monday.

McCaughan said he expects a “serious delay” in retail investors jumping back into equities, and he points to market volatility as one reason they have been scared off.

“There was the Flash Crash in May that hit the headlines, but there’s also been extreme volatility in the equity market for no major reason,” he explained. “Even in the last two or three weeks, we’ve seen 3 percent moves on no news.”

McCaughan said reform of the U.S. equity market is going to be necessary for the retail investor to trust the market again.

Front Running

McCaughan told CNBC there is “very strong circumstantial evidence” that front-running with high-frequency trading is occurring in many places, and he said this is partly to blame for the recent volatility in the equity market.

“When orders get pinged out to multiple trading venues there is at least circumstantial evidence that there’s quite widespread use of that information to front-run trades,” he explained.

“It’s very hard to prove,” he continued, “which is why FINRA and the SEC have to be very careful how they move with these explorations.”

Front running is an illegal practice that occurs when stock brokers execute orders on a security for their own accounts with the knowledge of pending orders from their business.