Canceled IPO, What’s Next For Global Stock Markets?

March 26, 2012

by Don Shaffer

Once again, we are faced with a “computer glitch” or “technical blip” in the increasingly volatile world of high frequency stock trading.

On Friday, BATS Global Markets, operator of a relatively new stock exchange that has captured 11% of all U.S. trading activity, was forced to withdraw its own IPO and refund all investors because its system crashed in the middle of the first day of trading.

Not only was its own stock offering wiped out, but trading of Apple shares was also halted on its system Friday due to the software problem.

Talk about embarrassing.

And much more importantly, this should send another shock wave of anxiety through the entire global capital markets system.

“…Cracks are appearing deep in the workings of the stock market that some professional investors say are making the market treacherous to trade.” October 18, 2011, Wall Street Journal front page.

Since computerized trading now represents 70% of all trades on the major stock markets by some estimates, we must reflect on the fact that investors and regulators do not understand what is going on.  When glitches occur like this one, and the so-called Flash Crash on May 6, 2010, we must recognize that we do not currently possess the ability to do anything to prevent the next system failure.

We must also acknowledge that individual investors in public equities do not matter anymore.  The simple truth is that institutional investors and computerized traders run the market.

At RSF, we came to the conclusion 18 months ago, with a few thoughtful exceptions, that we could no longer own shares in publicly-traded stocks due to the fact that no one can seem to get a grip on what’s going on with our financial system.  We are in the middle of a strategy to invest all of our assets in a way that is “as direct as possible”.  You can think of it as “off-the-grid” investing.

You may think: how much effect is that really going to have?  If thousands of other individuals and institutions do the same thing, it could have a huge effect over the next 5-10 years.  And even if we miss out on some liquidity and returns in the short-run, it’s better than sitting around waiting for the next Black Swan event in the months and years to come.

Something else to consider: why don’t Apple and Google and Intel and HP and Cisco and all the other major Silicon Valley companies get together to launch their own stock exchange based in San Francisco that is much simpler and more transparent?  How long will these companies (and others) continue to allow Wall Street traders to skim money and hold their executives captive with maniacal short-term earnings pressure that has absolutely nothing to do with long-term value creation?

The response from senior BATS executives, in essence:

“Just trust us, this won’t happen again.”

Additional articles on the BATS IPO can we found on Yahoo Finance and the San Francisco Chronicle.

Don Shaffer is President & CEO of RSF Social Finance.


  1. Working hard to make RSF Notes available in Social(k) accounts

    Comment by Rob Thomas — March 26, 2012 @ 2:02 pm

  2. Thanks, Rob, for your hard work!

    Comment by Marta Abel — March 26, 2012 @ 3:25 pm

  3. Hi Don, don’t lose heart! Mark and I have raised and closed the financing we need: the Social Stock Exchange is definitely coming and high-frequency traders aren’t welcome! Will we see you at Skoll in Oxford? Best, Pradeep

    Comment by Pradeep Jethi — March 27, 2012 @ 9:48 am

  4. Thank you for your post and congratulations on the decision by RSF to avoid publicly traded shares. In a comment letter to the SEC, we explained how feasible it would be for each public company to have its own trading market.

    As to alternative investing, you may find useful information in the “Direct Routes Open Now for Bypassing Wall Street” at

    Comment by Drew Field — April 3, 2012 @ 11:33 am

  5. Don,
    While I fully respect the decision to take investing “off-grid” (and love the term!), we must at the same time “fix the grid”. A Financial Transaction Tax would do wonders to reduce if not eliminate much of the predatory trading that occurs on the major exchanges, harming system resiliency. Better yet, we must ask questions such as who says stock exchanges should be “businesses”? It was not always that way. The need for massive technology investment drove the decision to privatize. They now have an incentive to grow trading volume, so the exchanges interests are no longer aligned with the small investor or even most institutional investors. But this is fixable with different rules. I fully agree, the listed companies should be demanding this. And in this case, let’s not fault the companies for the problem at the exchanges…

    Comment by John Fullerton — April 3, 2012 @ 11:57 am

  6. While “direct investing” is certainly a valid way to invest for institutions with significant capacity to build a diversified portfolio of ownership in companies–eliminating all publically traded companies certainly limits your universe of investment alternatives. Anyone with a longer term view of investments should not really care about the short term market disruptions you refer to(e.g. BATS, Flash Crash). A very good argument can be made that high speed trading while straining systems and telecommunications resources at exchanges do in fact add liquidity and reduce transactions costs for individual investors. High speed traders are probably neither bad nor good in the long term to the interest of a long term equity investor. I think your efforts in the area of B-Corporations and providing information about companies risks and activities related to non-financial impacts are much better placed then a blanket dismissal of public traded companies.
    On another note, while I applaud your efforts to further “local investing”, I doubt that the recently passed legislation to allow “small” investors to invest in early stage or nonregistered stocks will be positive in aggregate. My experience with early stage investments in companies without track records or requirements to regularly publish audited financial tells me that the expected return is negative.
    All that said, keep up your pioneering efforts to improve the performance of companies in multiple dimensions and innovate new investment products that support it !!

    Comment by Warren Langley — April 3, 2012 @ 4:05 pm

  7. John & Warren,

    Thank you for your thoughtful comments. I have a lot of respect for each of you, and it’s important to point out that I have developed my passion for finance in part because of conversations with each of you over the years.

    As background: John Fullerton is a former senior Wall Street executive, successful private equity investor, deep thinker/actor on these subjects, and President/Founder of the Capital Institute; I highly recommend a thorough visit to his website:

    Warren is former President of the Pacific Exchange and one of the world’s foremost experts on capital markets.

    So, related to the topics at hand:

    John, all points well-taken. Though I am out-of-my-depth on public policy and specific legislation re: Financial Transaction Tax, I recognize the need for “different rules”. And let me be clear: our issue is not with the COMPANIES, it is with today’s CAPITAL MARKETS and the financial system itself, as currently constructed.

    So when the “different rules” are in place, we will evaluate the best way to support the best companies with investment – as long as they have an advanced social/ecological mission and established practices to back it up. Today, we are unwilling to support directly or indirectly the existing exchanges, their investors, high-frequency traders, etc. because we feel the system is not serving us well. Means are ends.

    Warren, your points are very well-taken too. In particular, I agree wholeheartedly that we at RSF should stay focused on creating solutions (“innovative new investment products”, “improving the performance of companies in multiple dimensions”, etc.)…and we will.

    You may be surprised to hear that I agree with your assessment of the new crowdfunding legislation.

    Readers can get a good background on the new bill that will be signed into law on Thursday:

    And more analysis here:

    I’ve learned a lot about how hard it is to make good direct loans and investments, how much diligence is required, how many ways there are for things to go sideways for well-meaning entrepreneurs, etc….I know there are limits in the legislation (see link above) to how much non-accredited investors can invest of their retirement savings, yet I still have considerable anxiety about the potential for pain and backlash as the first wave of these investments goes bad. You can almost see the cynical journalists lining up now. I feel like the crowdfunding space could become even more Wild West than it already is….and I feel like there’s a good role for intermediaries who actually know something about how to decide whether a company is investment-ready or not. At RSF, we have made over $240 million in direct loans to small social enterprises over the last 28 years, with a less than 2% loss rate.

    Related to our position on investing in publicly-traded companies, again I would not interpret it as a ‘blanket dismissal’ of the companies. Correct or not, it’s the financial system itself that I have a problem with.

    I believe high-speed algorithmic trading is bad. I believe CDOs and other complex/opaque financial instruments are bad. I believe excessive securitization and leverage are bad. I believe the whole financial system needs to come back down to Earth.

    Hopefully, however flawed the logic, we can send a small signal into the market urging leading companies to pull out of the current system and set up their own exchanges that have “different rules”, enabling accredited and non-accredited investors to have a more straightforward financial relationship with the companies.

    I’ll close with a link to a transcript from a 2007 commencement speech by John Bogle, which addresses some of the excesses and fundamental greed in the financial system…..

    At RSF, we’re trying to go beyond the current level of fear and greed with our direct approach to “off-the-grid” investing, and believe, in the years to come, that we (humanity) may even be able to transcend the “animal spirits” and related “instability due to speculation” that Keynes wrote about in 1936.

    Thanks again, I appreciate that you took the time to add to the dialogue,

    Comment by Don Shaffer — April 4, 2012 @ 3:20 am

  8. Don
    Thank you for your thoughtful response. One other perspective I would add is that in the future people in the US will have to save more in their earning years to pay for medical care and living costs in their retirement years. To do that they will need efficient and effective ways to get financial returns from their investments over a long period of time. That is where I would focus efforts to add value. A lot of the issues John referred to about exchanges and the stock market system have to do with trading and traders and not investors. I would say that except in keeping costs low for me as an investor to change my investments from time to time, traders and the short term problems they cause are of no interest to me. Unfortunately over the past 20 years the internet, the media, and the marketing of financial services have made people think that they could be traders and beat the market. If there were more John Bogles educating people about long term and low cost investing, the coming generations might have a chance. If you are betting only on the long term growth of the economy you have a chance of winning–if you are betting on whether the market will go up or down today you will not be a long term winner. This doesn’t mean we don’t need to “fix” the various part of the financial system we have today, but it is a hard job with Wall Street lobbyists fighting you all the way as the path to the weakened Dodd-Frank bill has shown us.

    Comment by Warren Langley — April 4, 2012 @ 1:40 pm

  9. Don

    Congratulations on going “off grid”. This is a pioneering step in the right direction, and hopefully part of the larger emergence of a new investment asset class that sits at the convergence of Real Estate, Project Finance and Venture Capital, one that is purpose-built for monetizing sustainability.

    This innovation differs from the Exchange model in that returns are realized by staying in, rather than selling out.

    This allows Investment and Enterprise to align their interest in a shared focus on cash flows and core values.

    It won’t work for every business, but it promises real competition for the Exchange-traded option to those businesses where it can work.


    Comment by Tim MacDonald — April 26, 2012 @ 11:04 am

  10. Don, Warren, I note your negative take on the crowdsourcing legislation and I have heard many others with the same perspective–but what is a triple bottom line start up company to do? It’s not easy raising money for start ups, especially finding investors that don’t want to take over the whole company. I’d rather see folks like RSF jump into the crowdsourcing arena and do it right, with upfront due diligence, etc. rather than leave the field to those who want to take advantage of people.

    Comment by Robert Karp — May 2, 2012 @ 9:36 pm

  11. Thanks for your supportive comments Tim!
    And Robert, the crowdfunding topic is much more complex than what we can fit into a blog post. Don’t get me wrong, I believe the recent legislation may very well be heading us in the right direction. And we have been researching the crowdfunding space consistently for three years, considering what we should do, how we can best support it, to your point. Stay tuned for more, we’ll be involved in this field for sure. We’re just taking it step-by-step since we (all of us) are in the nascent stages of a big big shift in the investing world – towards much more direct, transparent, & personal forms of investing that are based on long-term relationships, place-based economies, and ecological stewardship. RSF intends to be a driving force at the leading edge of this field, just want to make the right move at the right time with the right partners!

    Comment by Don Shaffer — May 11, 2012 @ 11:37 pm

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