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Why Fewer People Trust the Stock Market

The Facebook IPO [3], one of the biggest and most publicized in the last few years, hurt “retail” investor confidence in the stock market. There was the hard sell by brokers (think Boiler Room style). Then investors not actually knowing, for a few hours, whether their brokers executed trades and at what price, which led to the $40 million fund to pay for the glitches [4] (which probably isn’t enough).

For a lot of regular people, it was the last straw and I don’t blame them. There was the freak out flash crash in 2010, when, in five minutes, the Dow dropped 600 points only to recover most of that 20 minutes later. The investigation later revealed that high frequency trading, while not the cause, contributed to the crash and brought HFT into the spotlight. I read one BusinessWeek article that said about 70% of the transactions in the stock market come from these traders.

Now, a study is showing that some hedge funds are getting an early peek at research analyst’s recommendations [5] (the buy, sell, hold recommendations) when those analysts answer questionnaires sent by the hedge funds. It happened when analysts revealed their opinions about Facebook’s IPO to their large clients, which is what prompted the inquiry.

Elevation Partners’ Roger McNamee shares his thoughts about the stock market:

I think many people can excuse incompetence like the Facebook IPO debacle. I think many people understand that it’s an unfair playing field from a technology standpoint – we aren’t really competing against high frequency traders picking up pennies, nickels, and dimes all day long. What I don’t think people can accept is an unfair playing field from an information standpoint or the possibility of another flash crash.

Oh yeah, let’s not even talk about the LIBOR scandal [6] – which has a far reaching impact beyond the financial markets.

I think the stock market is best used as a convenient way to invest for the long haul (minimum five years) in quality companies, or index funds. I don’t mess with IPOs, I’m not really hurt or helped when analysts make surprised changes to their opinions (because we invest in the long haul), and high frequency trading doesn’t impact us (again, long haul). But I do worry that as fewer and fewer people get involved in the market, because of this lack of trust, our little stock market Ponzi scheme [7] is going to run its course. 🙂

Has your opinion of the stock market changed as a result of the last few years of revelations?