By Pam Martens: June 20, 2012
The House of Representatives held a hearing at 9:00 a.m. this morning titled “Market Structure: Ensuring Orderly, Efficient, Innovative and Competitive Markets for Issuers and Investors.” The hearing was convened by the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee. The panel included no one representing the public’s voice.
Four of the panelists called attention to the loss of confidence that the public now has in the stock market. Those views are in stark contrast to the perpetually repeated statement by Jamie Dimon, Chairman and CEO of JPMorgan Chase, that “We have the widest, deepest and best capital markets in the world.” There are now 264,000 links at Google’s search engine to some variation of that statement by Jamie Dimon, e.g., “the best capital markets,” “the widest, deepest and most transparent capital markets.”
The gap between Dimon’s statement and investor perception is that the public doesn’t measure markets by width and depth, they measure markets by fairness. And on that point, public investors give Wall Street a resounding thumbs down. Holding a hearing without any public representation will do little to restore that confidence.
Below are excerpts from the written testimony of four of the panelists today.
William O’Brien, Chief Executive Officer, Direct Edge
“Investor confidence in U.S. equity market structure is perhaps at its lowest point since the Great Depression. A 2010 Associated Press/CNBC poll showed that 86% of respondents believed that the stock market was ‘not generally fair’ to small investors. Since that time, several high-profile incidents have led the investing public to seriously questions whether the stock market is on a sound operational footing. You can question the merit of such concerns – but you cannot deny they exist. An intellectually consistent and operationally feasible plan is needed to start the process of restoring that confidence.”
Jeffrey M. Solomon, Chief Executive Officer of Cowen Group, Inc.
“The last decade has shown a significant decrease in the trading liquidity for most small cap issuers. At the same time, retail investors are less relevant than institutional investors in individual stocks as evidenced by the popularity of mutual funds and Exchange Traded Funds, who are now the dominant market participants. A lack of liquidity in any small cap stock makes it difficult for investors to accumulate a position. Moreover, portfolio managers carefully assess liquidity when determining position size and price as they know it may be hard to get out of the stock when their price targets are reached or should they need to sell to generate liquidity to meet investor redemptions. This dynamic has severely narrowed the investor universe for small cap companies thereby making it difficult for them to raise capital to expand. Indeed the number of IPOs raising less than $60 million has fallen precipitously over the past decade.”
Kevin Cronin, Global Head of Equity Trading, Invesco, on behalf of the Investment Company Institute (ICI)
“Unfortunately, over the past several years, long-term investor confidence has been challenged by a series of scandals, financial crises, and technological mishaps affecting the operations of exchanges, broker-dealers and automated trading systems — including, most recently, the problems surrounding the Facebook IPO.
“To ensure long-term investor confidence, it is incumbent upon regulators to address issues raised by developments in the structure and operation of the securities markets and the impact of those developments on investors. ICI believes that regulators have fallen short of this important objective, most likely because the implementation of the Dodd-Frank Act has diverted SEC resources to mandated rulemaking. Significantly, numerous issues raised by the SEC’s concept release examining the structure of the U.S. securities markets have not been addressed, including issues surrounding high frequency trading and undisplayed liquidity, as well as the adequacy of information provided to investors about their orders.”
Duncan Niederauer, Chief Executive Officer, New York Stock Exchange/Euronext
“Capital flows in the equity markets over the past several years underscore a lack of investor confidence in the securities markets. For example, data on investments in equity mutual funds suggest that investor confidence in the equity markets is at risk. The data show that over the last several years, investors, particularly small investors, have withdrawn billions of dollars from domestic equity funds. As with investor confidence generally, significant negative market events seem to affect negatively investors’ participation in the equity markets. For example, the equity markets experienced increased capital outflows after the market events of May 6th [the Flash Crash]. Perhaps more significantly, however, investor withdrawals in recent years have continued even in the absence of significant events and even during periods of increases in the US stock prices. This behavior is inconsistent with historical patterns that show that investors typically invest in the equity markets during times of rising prices.”