There has been a lot written over the past couple of years regarding the lack of investor sentiment with the decline in participation from retail investors. We’ve heard over and over about how the investor sentiment has generally been negative by the retail customer. This is best seen by the average volume drop, especially this year. There are several reasons that are certainly justified for this poor investor sentiment, but the average retail client should focus on long-term investing and not on competing with large institutions over short-term trading.
One recent development that will hurt investor sentiment once again, as the big guys are receiving preferential treatment, is that the parent of the New York Stock Exchange (NYSE), NYSE Euronext (NYSE/NYX), has just paid $5.0 million to settle allegations by the Securities and Exchange Commission (SEC) that the NYSE Euronext delivered trading data to preferential customers who paid for it.
The NYSE Euronext had essentially two streams of trading data; the regular data stream that the average retail long-term investing customer sees and the paid-for data stream that was delivered faster, primarily to high-frequency traders (HFTs). This is yet another blow to investor sentiment against the exchanges, who are trying to bring back the retail client. As we’ve seen for months with the Occupy Wall Street movement, people aren’t thinking about long-term investing; people are thinking about the fact that they are losing out to the large institutions, upsetting independent investors. And it appears that the playing field has indeed been unfair over the short term.
The problem has always been with the exchanges and how to balance new technological breakthroughs and new streams of revenue versus investor sentiment. Ultimately, the exchanges need the retail public to participate in the market, especially for long-term investing. For this to occur, the average investor sentiment needs to be one in which everyone is on an equal footing. This conflict of interest—obtaining fees for data versus the structural integrity of the exchange—has clearly shifted for the exchanges towards taking the cash.
In an instance where the exchanges have so much control in a market that is not open to competition, the regulator can and should step in to level the playing ground. The very foundation of this country is built on risk-taking through starting new ventures. If investor sentiment is damaged, this could lead to a whole generation of people not being active in the markets. This also means they damage their retirement planning, as long-term investing through the market is a necessary conduit to financial success.
This is the regulators’ first shot at leveling the playing field. There are many more steps that need to be taken to regain investor sentiment, but at least this is a good first start. Obviously, a $5.0-million fine is very small for the NYSE Euronext, but it’s a message that the security regulators are determined to build safeguards so that the average investor can feel secure when they’re making their long-term investing decisions.