Michael McCaslin is wary of investing his retirement funds in Wall Street. Its volatility and cryptic trading techniques make him feel lost and unsafe, he says.
“I tried to watch the market over the past couple of years, and you’re just lost. I look at the market now and it’s like Las Vegas, it’s a gamble,” the 65-year-old pensioner said.
Like most Americans, McCaslin has his retirement saving plan, known as a 401k, invested in stocks. Most of his funds are handled by an investor, but he manages 10 percent of the money himself from his home in Greenville, Texas.
Yet the extreme instability that has characterized the markets since the 2008 financial meltdown, often blamed on highly speculative trading, and the increased use of super-fast automated trading systems make Wall Street a tough environment for small investors.
And as a result, more Americans have fled the stock market in recent months.
After seeing his portfolio lose 40 percent last year and rise back to a smaller 10 percent loss in 2010, McCaslin has little trust in Wall Street, the emblem of US capitalism.
“Wall Street is, in my view, a bunch of greedy people who control a lot of money with large investment companies who can manipulate the market,” he says.
“I don’t have that ability, I am at the mercy of these people and with their automatic trading and the other things they can take advantage of, I don’t know what can happen to the market because, you know, it can happen in milliseconds with the automatic trading,” he said.
Often known as high frequency trading (HFT), the ultra-fast algorithms buy and sell millions of shares a day, executing deals within split seconds. They today account for more than 50 percent of daily trading volume.
HFT has come under increased scrutiny and criticism following the May 6 “Flash Crash” which saw market indexes dive by more than nine percent in minutes, only to rebound again after seconds.
The stock exchange’s extreme volatility and complexity leaves average investors scared.
“The people who are not quite professionals but not quite buy and hold investors… have just been killed and frightened,” said Mace Blicksilver of Marblehead Asset Management.
According to Marc Pado, analyst at Cantor Fitzgerald, “For an individual losing 10 percent of their retirement in a single day is just stunning to them. Stunning.”
Now McCaslin would like to minimize his investment in shares, but says that the other, safer, investment options simply don’t yield enough profit.
“I don’t know where to put the money. You can’t put the money in bonds because they don’t pay anything and I can’t put it away for long term, because I won’t be around long-term, so I am kind of in a limbo.
“I am at the mercy of the market if I want to get returns.”
Even savvy traders find it almost impossible to master the stock market as trading increasingly becomes dominated by machines and fractured by a myriad of highly specialized and often little-known markets called black pools.
“How can I compete with a computer system that can put in 200, 300 trading orders in a second?” asks Troy Hanninen, a professional individual investor who works from his home in Missoula, Montana.
If Hanninen wants to buy stock at 35 dollars a share, computers will get them a fraction of a second before him at 34.999 dollars, he says.
“Ever since the domination of the computers came out, you have many individual traders like me struggle because of the ability of high frequency traders to sub-penny us… that issue has driven liquidity from the market.”
McCaslin and Hanninen reflect concerns voiced last week by the head of the US government stock market watchdog that individual investors have been turning away from equities in recent months.
Many individual investors “have submitted comments to the Commission that are highly critical of the current market structure, said Mary Schapiro, chair of the Securities and Exchange Commission (SEC).
“Retail broker-dealers have told us that their customers — individual investors — have pulled back from participating in the equity markets since May 6,” she said.
The SEC’s website has been flooded by letters from angry and frustrated investors in recent months.
“I recognize that there may be a variety of reasons for reduced participation in the equity markets, but the trend is troubling, particularly if concerns about equity market structure are playing even a small role in investor decision-making,” Schapiro said.
The SEC is set to release its report on the Flash Crash this month, which will likely include measures to strengthen the stock markets, most notably by regulating high frequency trading.