Tags: Fear | Distrust | Investors | Stocks

NY Times: Fear, Distrust Make Investors Shun Stock Market

By    |   Tuesday, 15 May 2012 01:24 PM

Investors are shunning the stock market because of distrust as well as fear. Policymakers should take notice and strive to restore trust, argues The New York Times.

Investors aren't keeping their money out of stocks just because of recent asset bubbles and stock market crashes. Scandals and the slow, uncertain pace of financial reform, as shown by the recent $2 billion trading loss at JPMorgan Chase, have destroyed their trust in stocks, the Times asserts in an editorial.

If stock markets don't regain investor trust, it argues, fewer companies will raise money by issuing stocks.

Stock prices have largely recovered from their lows three years ago, but trading volumes haven't, the Times points out. Average daily trades in April were 6.6 billion — about half the volume four years ago. In previous cycles, trading usually recovered much faster.

Although investors put $52 billion into stock mutual funds from 2004 to 2007, they reversed course and have withdrawn more than $400 billion since 2008, the editorial notes.

Investors feel the stock market is unfair to them, according to the Times.

For instance, brokers are supposed to find the best price for them. Yet with stock exchanges giving brokers rebates in return for their business, brokers may be more motivated by rebates than the best price.

Former SEC economists, the Times says, have stated that "in other contexts, these payments would be recognized as illegal kickbacks."

Sen. Charles Schumer, D-N.Y., is urging the SEC to put a stop to that practice, known as the "maker-taker" pricing system.

"These models create a conflict of interest, as brokers may be incentivized to execute trades on a particular venue even if that venue is not offering the best price," Schumer wrote in a letter to SEC Chairman Mary Schapiro, according to Reuters.

Investors may be paying "billions of dollars a year in hidden costs," he wrote.

The SEC, Schumer argues, should require brokers to disclose all payments and pass costs along to customers to avoid conflict of interest, Reuters reported.

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Tuesday, 15 May 2012 01:24 PM
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