Yield of Dreams

Our Stock Markets No Longer Work; Here’s Why

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Retail investors have yanked $99 billion out of stock funds this year, but maybe it’s not because of fear. The former CFO of MF Global argues that investors simply don’t understand all the rules.

Year-to-date through October, retail investors have yanked about $99 billion out of stock mutual funds, already outpacing 2011, when investors took about $80 billion out of equity funds. Why? What I’ve argued here time and again is that investors are scared; after enduring two market crashes in the last 10 years, they’d rather put their precious assets into safety (i.e. Treasuries), not equities.

But according to a recent essay by former MF Global CFO Amy Butte, investors aren’t getting into the stock market because they simply don’t understand all the rules:

Want to know a dirty little secret? Our stock markets no longer work.

They have grown so complex, fragmented and opaque that they don’t serve their stated purpose. Rather than a place where individual and professional investors can put a value on shares and where companies go to raise capital, the markets today look more like a video game. The trouble is, it’s one where only a few understand all the rules.

Excessive complexity has costs. Individuals, wary of an uneven playing field, may choose not to invest. Long-term investors, frustrated by a market that doesn’t value their participation, may take their trading to overseas venues or alternative private networks. Companies, unaccustomed or unprepared for the amount of work needed to go public, may look for other forms of capital, such as debt or private equity.

Her evidence certainly points to the complexity of the stock markets today. These days, when someone wants to buy a stock, they have more than 100 order types for each of the 13 U.S. exchanges to choose from, and that doesn’t even count dark pools. According to Butte, high frequency traders account for more than 50 percent of market volume today.

These days, you’ve either got to be a quant genius or God to make the right calls and navigate the complexities of the equity markets. Just today I was reading a profile of technical analyst Tom DeMark of Market Studies:

DeMark’s system for predicting where markets will move, divined from four decades of chart gazing, is based partly on the recondite mathematical relationships that devotees see in the design of the Parthenon in Athens and the Great Pyramid of Giza. Get DeMark’s followers talking, and their enthusiasm for his market calls is unbounded.

The article goes on to stress that the demand for and interest in technical analysis has never been higher, the article notes:

Technical analysis is in the midst of a post-financial-crisis boomlet. Tyler Wood, marketing director at Market Technicians Association, says there has been a 30 percent jump in new members in the past two years, pushing its rolls to 4,500 as of mid-October.

What do you think? Has the pendulum swung too far, as Butte suggests? Her answer to the problem: simplify by the markets by limiting the number of orders, and contain trading volume. The market should be easy enough for a high schooler to understand, she also says.

Discuss this Blog Entry 1

on May 14, 2013

Your article favor sufficient info about stock market changes.Stock market is very complex to understand its changing graph time to time.

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Casting a gimlet-eye on asset management issues.

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