Introduction
When I became a professional securities
analyst in the 1960s there was a trend to have two separate research and
marketing efforts of brokerage firms. A traditional effort to serve individual
investors was joined by a second, and
higher paid effort to serve institutional investors. Around the cyclical
movements of the stock market, individuals and institutions invested differently
and each fed off the other's transactions. Institutions were able to buy what
they thought were cheap stocks from supposedly unsophisticated individual owners
and sell into them when individuals were not well enough informed. Interesting
this dichotomy did not work to the disadvantage of the individual investors as
much as it may have seemed. Individual investors were not only net buyers, but
for the most part long-term investors that often facilitated the more rapid
turnover of the so-called professional investors.
This relationship is no longer the case.
Because of the decision of the US government to introduce price competition in
brokerage commissions (which led to a price war) the profitability of directly serving
the individual long-term investor declined meaningfully. Today try to get a
“full service” retail brokerage representative to be interested in opening an
account to handle the sporadic purchase of a hundred shares of a NYSE traded
securities. If the broker can’t get the customer to open a margin account, buy
new issues, trade over-the -counter securities or place decision making judgment
in a managed account or a packaged product or possibly an automated
relationship with a call center, chances are he/she will not be interested in
the relationship with the perspective customer. Only the alternatives just
suggested are profitable for the firm and the individual broker. Thus
relatively few individuals are directly active in today’s stock market. They
are investors through their employers’ defined contribution plans, land stock
purchase plans, and or mutual funds/variable annuities or in some cases stock
options.
The plain truth on most days, particularly
in the summer months, almost all the transactions come through various
institutional channels. The market has become largely a game of professionals
competing against each other for research and trades. In some respects the
market has become more susceptible to sudden volatility within the trading day
as the professionals in this interconnected world react to each incremental
research element and price change. Thus, a different sort of market analysis is
required to avoid being at a competitive disadvantage.
The Players
Exchange-Traded Funds (ETFs), and Exchange
Traded Notes (ETNs), while relative small in terms of assets as compared with
other institutions, are selectively
quite large in the intra-day markets. While the regulators believed that when
they permitted the creation of these vehicles in the US and a number of other
markets, that individual investors would benefit from their low cost and
trading efficiency, they really created trading vehicles for fast trading
professional investors including hedge funds, market makers, managed accounts
of investment advisors, central banks (Tokyo), and other institutional players.
In many weeks the aggregate net
transactions in ETFs is larger than those of conventional mutual funds, even
though their assets are less than half of the assets of mutual funds. While
there are thousands of ETF transactions in a given week, the vast majority of
transactions are in a couple of products that professionals are using to invest
or hedge with or without margin type leverage. According to my old firm,
Lipper, Inc., for the week ending
Wednesday there was $6.7 Billion in net purchases of equity ETFs; $4.4 Billion
went into PowerShares QQQ Trust EFI, invested in the 100 largest NASDAQ stocks,
and $1.2 Billion into the iShares Core MSCI EAFE Index fund or about 5.65% of
that fund’s total net assets. This left approximately $100 million for net
purchases of all other equity ETFs.
A similar pattern was present on the
taxable fixed income side which had total net purchases in the week of
$1.2 Billion, with $1.1 Billion into two funds, iShares 20+Year Treasury Bond ETF, and iShares Core Total
U.S. Bond Market ETF.
"Individual Investors Should Worry Professionals"
No comments yet. -