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October 1, 2012

Equities Pros Losing Faith in Market

By John D'Antona Jr.

Don't look now, but even equities market professionals are losing faith in the market structure. Things have gone from bad to worse.

Those are the findings of a survey by industry consultancy Tabb Group.

Surveying market participants between Aug. 6 and 13, the firm learned from a pool of 260 respondents that 34 percent of those surveyed had a "weak" or "very weak" view of equity market structure. That is up from 31 percent in June, who said their confidence was either weak or very weak following the botched Facebook IPO.

Adam Sussman

On Aug. 21, Tabb Group released a study on confidence in equity market structure confidence. The survey was sent to broker-dealers, asset managers, hedge funds, execution venues and vendors.

Traders have dramatically changed their industry view over the last few years. After the May 2010 "flash crash," only 15 percent of respondents viewed the market structure as weak or very weak. Only 2 percent rated their confidence as very high.

Adam Sussman, partner and director of research at Tabb and author of the survey, noted the two-year skid in faith. According to survey respondents, reducing fragmentation within the market was the best way to halt the slide, he said.

That answer drew interesting responses. Sussman told Traders Magazine that even if certain market fixes or perceived fixes took place-such as implementation of new proposals like "trade-at," a minimum price-improvement requirement for dark pools or other rules-fragmentation remains a problem. Based on survey feedback since the survey's release, reducing fragmentation often was interpreted to mean more exchange-friendly proposals and rules. Dark pools and other venues were eyed as scapegoats.

The idea of curbing fragmentation elicited a venue operating official to tweet that denying new exchange licenses or curtailing dark pool trading was OK with him.

Sussman wasn't sure if addressing the fragmentation issue through new rules or other fixes was enough to assuage market professionals, let alone institutional or retail investors.

That point was echoed by the broker-dealers and execution venues. They said the weak market confidence numbers are the result of weak stock market returns, not market structure issues or reforms.

"Market structure is a necessary but insufficient lever to regaining investor confidence," he said. "We could have perfect market structure right now, but equities are still underperforming."

According to the Investment Company Institute, investors have pulled $16 billion from domestic equity mutual funds during the third quarter. In comparison, they've put a little more than $12 billion into bonds.

The survey's focus on fragmentation or market structure might also be a case of not being able to see the forest through the trees, Sussman added. Indeed, fixing market structure isn't bringing average mom-and-pop investors back to equities. "If the professional trading community is running scared, what is the public thinking?" he asked.

Sussman expects investors to pour new cash into equities later this year.


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