Andrew Ross Sorkin wrote an interesting Dealbook column in the New York Times today exonerating computer trading and Wall Street misconduct from responsibility for driving investors out of the markets. While he gets a gold medal for linguistic gymnastics, he ultimately falls short for ignoring reality and facts.
He begins by (selectively) quoting former SEC Chairman Arthur Levitt and Better Markets’ President and CEO Dennis Kelleher as “experts” who he says are “hyperventilating” and blaming computers for everything bad that’s happening in the markets, including in particular driving away individual investors. Mr. Sorkin says Levitt and Kelleher are wrong, that investors are fleeing largely due to fundamentals like poor equity returns and macro issues like slow to no economic growth, high unemployment, European debt crisis, etc.
So, there is no dispute that “investors are fleeing the markets like never before.” Mr. Sorkin just claims it’s not because of high speed computer trading, a claim he pulled from an interview Mr. Kelleher gave to the LA Times newspaper (which was just one of dozens of quotes from interviews over the last several days, on TV from PBS to FOX and in print from Marketwatch to Dow Jones).
Mr. Sorkin also agrees that a “crisis of confidence…. does exist among investors,” but that “they are not focused on how computers are making the markets go haywire. Rather, they are concerned about the future of the economy and, yes, trust.”
He goes on to say that “individuals are worried that it’s hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street’s own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don’t believe they stand a chance against the professionals.”
Confirming that — and so much more — he then cites a study of “878 students from 18 high schools across 11 different states” in which “three quarters of them said they agreed with th[e] statement [that] ‘[t]he stock market is rigged to benefit greedy Wall Street bankers.’”
But then, remarkably, rather than talk about why those high school students think that, why people are concerned about trust in the capital markets, why individuals are worried the markets are rigged against them, or why individual investors don’t believe they stand a chance against the professionals, Mr. Sorkin concludes by saying “[i]nstead of pointing the blame at one incident or another, look at the fundamentals.”
Here is where Mr. Kelleher and Mr. Sorkin disagree. None of this is an either/or proposition. It’s not the fundamentals or computer trading or Wall Street misconduct or one scandal after another. It is the fundamentals and computer trading and Wall Street scandals and lots more. To ignore or deny the effect of the daily drumbeat of Wall Street mishaps and misconduct like the Knight Capital implosion, JP Morgan’s London Whale losses, the metastasizing Libor Scandal, HSBC and Standard Chartered criminal conduct, plus the Facebook and BATS listings debacles and high frequency trading incidents like the Flash Crash (not to mention the rot revealed by the 2008 financial crisis like no-accountability bailouts and Goldman’s Abacus deal) is to deny reality, how investors think and how markets work.
Fair or unfair, all of those incidents plus the lousy fundamentals combine to give people the impression or belief that the markets are a bad investment, that they are rigged, that the professional insiders have an advantage, that whoever has the fastest computer wins, and that individuals and ordinary investors just don’t stand a chance.
Suggesting that these issues are interconnected isn’t illegitimately lumping unrelated things together or claiming they are equivalent or are equally responsible for the condition of today’s markets, as Mr. Sorkin suggests. Rather, it is to take the uncontroversial position that context, events and the headlines matter, individually and cumulatively. That is what I have been saying for some time now, which was not reflected in the one quote selected to create an argument apparently for the purpose of knocking it down.