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New York Times Room for Debate


It's a Problem of Political Will

August 07, 2012

By Nicole Gelinas

Investors and speculators always have existed uneasily together in financial markets. In the last two decades, though, markets have favored speculators at the expense of investors – and are driving regular people away.

What’s the difference between investors and speculators? Investors have an eye on the future. A person might purchase a portfolio of stock in 15 American companies over time, for example, because he thinks that the economy will grow and the companies will do well, meaning higher stock prices and dividends in a decade’s time. A speculator, on the other hand, buys a stock one morning and sells it a few minutes later.

Investors need speculators. Speculators trade often, so they add liquidity to the marketplace. The heavy volume of stock trading they provide keeps trading costs down.

And speculators as well as investors help keep companies honest. Exxon cannot decree that its stock is worth one price if tens of millions of traders have a different opinion.

But we all need water, too – and yet can still drown in it. Hyper-speculation fueled by computer programs that buy and sell securities almost instantaneously – and programs that flash bids purportedly to purchase stock only to snatch the bids away away before consummating the order – can confuse the marketplace rather than clarifying it.

Events like the May 6, 2010, "flash crash" and last Friday’s Knight Capital trading debacle scare long-term investors away, further destabilizing markets. "Dark pools" that trade securities without the free and public information that markets need add another layer of usual murk punctuated by blinding panic.

Regulators can curtail some of this activity – largely by applying the rules that once governed the market when it was dominated by the New York Stock Exchange. Market manipulation and front-running other participants’ trades is illegal – and programs that aim to manipulate prices should therefore be found and shut down. Trade prices should be posted publicly and immediately.

Companies whose programs run amok should be banned from trading – and should bear the cost of restitution to other investors, even if the cost forces them into liquidation.

The problem isn’t the technicalities of the necessary rules; these and others aren’t that hard. The problem is a government whose two main parties are still in thrall to big finance.

If Washington doesn’t change course soon, it risks losing a generation of investors, if it already hasn’t. Today, according to Federal Reserve statistics, only 10.1 percent of families whose head is under the age of 35 invest directly in the stock market. In 2004, the figure was 13.1 percent.

The stock-market mutual-fund industry, too, which pools money for small investors, has suffered withdrawals now for four years running, including $128.2 billion withdrawn last year. That’s the first time the industry has suffered two consecutive years of investors withdrawing money rather than adding it since at least 1990, according to the Securities Industry and Financial Markets Association.

Washington’s current course risks ratifying a financial world in which computer-driven speculators trade largely with each other. Regular people – including regular people with deep knowledge of financial markets – find this world ever more irrelevant to their lives and pocketbooks.

Original Source:



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