Could efficient trading technology be doing U.S. stock markets more harm than good? A new study of market dynamics by Grant Thornton reaches that surprising conclusion - and calls for reforms designed to shift power away from users of high-frequency trading algorithms and back toward the smaller companies covered by fundamental stock analysts and long-term investors.
The report cites a long-running decline in the number of new stock listings in U.S. markets, which it dates back to at least 1991 (before the enactment of Sarbanes-Oxley, and before the burst technology bubble). Grant Thornton leaves little doubt where it sees the blame:
"Today the market is dominated by firms that buy and sell in milliseconds, using automated algorithms that have no interest in the fundamental valuations underlying stocks. They include proprietary trading, statistical arbitrage hedge funds, and automated market makers. The result? Investors, issuers and the economy have all been harmed. Wall Street is now fixated on trading profits and has abandoned investments in quality sell-side analysis, underwriting and sales support - the infrastructure necessary to support and create value in small cap stocks."
Allegations that the SEC has tilted toward favoring "traders" over "investors" have been around for some time. Where some see conflict, we always thought the two groups acted to complement one another: arbitrage and other activities of traders add liquidity, help to hold down investors' cost of doing business, and keep securities prices from straying too far from underlying values.
Grant Thornton's announcement include an explicit call to "urge Congress to act," and has a quote from U.S. Sen. Ted Kaufman, D-Del. Although the firm doesn't explicitly call for rolling back market structure and technology to what existed in the 1980s, a move to re-examine U.S. equity markets will likely be seen as inimical to the further growth of algorithmic trading, one of the hottest areas of job creation in recent years.
A Wake-Up Call For America [Grant Thornton]
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