While the powers that be are often slow to admit self-evident truths, the CEO of the New York Stock Exchange actually admitted that investors have lost faith in the financial marketplace in testimony before Congress (See “NYSE CEO: Public Has Lost Trust in Market”). The financial markets which have become platforms for high-speed, short-term trading of complex products and havens for insider trading rather than long-term investing are becoming viewed as more of a high stakes gambling casino than an investment marketplace.
“The public has never been more disconnected [and] has never had less confidence in the underlying mechanism,” Duncan Niederauer, CEO of NYSE Euronext, was quoted as saying, adding: “What used to be an investors’ market is now thought of as a trader’s market.”
Mr. Niederauer blamed the flow of funds away from exchanges and into private markets, so-called dark pools, run by financial firms, thereby reducing the amount of buying and selling behind publicly available prices. Those like Mr. Niederauer, who believe that financial markets favor the biggest and fastest traders at the expense of smaller retail investors, point to high-speed computers and dark pools as major problems.
Dark pools are private, off-exchange, computerized-trading platforms. They are lightly regulated compared with exchanges. Dark pools developed as broker-dealers took advantage of regulations designed to maximize competition in stock trading. In recent years, dark pools have siphoned off one-third of the trading volume from exchanges, according to the article.
Mr. Niederauer and others object to the lighter regulation enjoyed by dark pools and other private stock venues.
Still others reply that exchanges also enjoy special benefits and immunities. The head of Credit Suisse stock trading, Dan Mathisson, reportedly told Congress that they should strip the exchanges of their legal immunity from liability for system outages, such as those that plagues the Facebook IPO. “You should not be able to be a for-profit and a not-for-profit at the same time,” Mr. Mathisson was quoted as saying.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.