OPINION
July 10, 2013, 7:25 p.m. ET
Why Individual Investors Are Fleeing Stocks
High-frequency trading, flash crashes, policy uncertainty. There are ways to fix this.
By CHARLES SCHWAB AND WALT BETTINGER
Our firm was founded 40 years ago on the belief that all Americans should have the opportunity to invest in the stock market with the same advantages available to institutions and the big guys. But looking at our capital markets today, we should all be concerned.
It's becoming increasingly difficult for individual investors to compete on a level playing field. The system seems rigged against them. And they are responding by walking away.
It's becoming increasingly difficult for individual investors to compete on a level playing field. The system seems rigged against them. And they are responding by walking away.
A Gallup survey conducted in April found that just 52% of Americans were invested in "an individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA." This is the broadest ownership of capital in the world, but it is down from a Gallup-survey high of 67% in June 2002. That's not good for individuals, and it's not good for the country.
Investors are the lifeblood of the economy. They provide the capital that spurs job creation, innovation and entrepreneurship.
No one will benefit if individual investors stop participating in the markets. But that is what's happening at a troubling rate. Here are some reasons for that trend—and our recommendations for restoring balance:
No one will benefit if individual investors stop participating in the markets. But that is what's happening at a troubling rate. Here are some reasons for that trend—and our recommendations for restoring balance:
• High-frequency traders are gaming the system. Using sophisticated algorithms, high-frequency traders can trade stocks in an instant. Some flood the market with orders, then cancel 90% or more once they've glimpsed the state of the market and gleaned an advantage. Almost all "co-locate" their computer servers as physically close as possible to those of the exchanges to cut down the travel time of information by microseconds and then trade on that tiny speed advantage.
Acknowledging this new, high-speed environment, last September the Securities and Exchange Commission levied a $5 million fine on the New York Stock Exchange—the first ever against a U.S. exchange by the regulator—for providing stock-price quotes and other data to certain firms just moments ahead of the public. As Robert Khuzami, then director of the SEC's Division of Enforcement, said at the time: "Improper early access to market data, even measured in milliseconds, can in today's markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors."
It was a watershed moment, but regulators need to do more to ensure that all professional traders are playing by the same rules as the rest of us. A penalty on excessive cancellations, rigorous enforcement of rules regarding information access, and a top-to-bottom study of the NYSE's 40-year-old Market Data System would be good places to start.
• Glitches and errors plague the markets. From the "flash crash" of 2010 to the glitch-riddled Facebook FB +1.24% IPO in 2012 to the market-wide shutdown when Hurricane Sandy hit New York, individuals are losing confidence in the integrity of the system. In April, a Twitter hoax claiming President Obama had been injured in an explosion at the White House sent the market spiraling downward in seconds, with computer-driven trades flooding the market the instant the false news hit the wires.
Regulators have been slow to respond to the epidemic of market glitches large and small. Stronger steps—such as imposing "kill switches" to stop trading in a stock when a problem occurs—need to be taken to ensure that systems can detect and isolate a problem before it spreads across the market.
• Tax policies here and abroad discourage investors. In the U.S., tax rates on capital gains and dividends went up for some investors in 2013, compounding a new surtax on investment income for wealthier taxpayers that went into effect this year as part of the new health-care law. While we support the goal of increasing health-care coverage for all Americans, doing so on the backs of investors seems shortsighted.
Overseas, a financial transaction tax is under consideration in several European countries. It's another tax on investors. Thus far, the Obama administration, to its credit, has been steadfast in its opposition to such a tax in the United States. But some in Congress see a tax on investors as a potential boon to the Treasury. As lawmakers debate tax reform, they should encourage investing, which boosts savings, rewards the good ideas of entrepreneurs and stimulates the economy.
• The retirement savings system is under attack.Private savings for retirement has played a critical role in supplementing safety-net programs by helping millions of Americans prepare for their futures. But instead of being celebrated, the laws that better enable people to take care of themselves are facing criticism and calls for drastic change.
President Obama's recent budget would set an arbitrary cap on the total amount of retirement savings an individual can accumulate in tax-advantaged retirement accounts. Reducing contribution limits to employer-sponsored 401(k) plans and individual retirement accounts is openly discussed on Capitol Hill. Some are even calling for the entire system to be replaced with one run by the government.
The system we have is not perfect. But instead of hindering it or scrapping it altogether we should be enacting policies that make it easier for employers of all sizes to offer employees a savings plan, encouraging market-based innovation, and making a concerted national effort to educate America's workers on how to maximize retirement plans, particularly with low-cost investment choices.
If policy makers in Washington embrace these goals, individual investors will regain the confidence that someone is fighting for them. Confidence and participation in the markets will rise, and the economy and average individual investors will benefit.
Mr. Schwab is the founder and chairman of the Charles Schwab Corporation. Mr. Bettinger is the company's president and chief executive officer. SCHW -1.19%
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