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.”
Don Shaffer is President & CEO of RSF Social Finance.