Thursday, February 17, 2011

Usually, I have stronger visceral reactions to things I read, not so much videos

Today was different: here is Felix Salmon being interviewed by Aaron Ross Sorkin.

Here is my incredulous comment:
I think that Felix is going to make stocks less accessible to the general public by eliminating high frequency trading. Decimalization, electronic trading, and now HFT have provided incredible liquidity. A stock trade now costs $2 (in 2011 dollars) not $200 (in 1971 dollars). And this is because of moving from eighths to decimals, and because of moving from specialists, $2 brokers, and block desks.

Which crash was worse and took longer to recover from? 1987 or the Flash Crash? HFT is estimated to take $2 billion in profits out of the market, but I wouldn't be surprised $20 billion has been returned to retail investors by financial disintermediation, if it is on the order of the reduction in commissions retail investors pay. [Note: I should have also commented "not to mention crossing a spread of 1 or 2 pennies instead of 12.5 to 25 cents"].

And if regulation makes public corporations more expensive to run, of course there will be fewer, larger corporations because of economies to scale.

Of course publics will be taken private and left that way, if listing and reporting requirements are significantly less of a burden. This is just natural incentives. Regulation ain't free, as much as anyone wants to wave it away. Before the Internet, I used to have to go to the DMV and stand in long queues. If I could have avoided that with a cheaper alternative (like I have now), I would have chosen the process today. That is the choice I see companies making.

The market capitalization of the NYSE in 1950 was about $100 billion. Now it's about $15 trillion. So yes, the number of listed stocks has halved from 8,000 to 4,000. So instead of holding 50 stocks in a portfolio, hold 25! What is the right number of listings? I'm not sure how much difference there would be between 5- and 10,000.

Salmon and Sorkin are great writers, but this was a puff piece.

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