NEW YORK (Reuters) - There has been a “breakdown” in the structure of the U.S. stock market that regulators need to address in order to shore up investor confidence and long-term prospects for the economy, Steven Einhorn of hedge fund Omega Advisors said on Monday.
Omega’s vice chairman pointed to the volatility on Aug. 24 when the markets opened dramatically lower, with the Dow Jones industrial average briefly slumping more than 1,000 points - its most dramatic intraday trading range ever - following an earlier selloff in China.
“It happened because of a breakdown in market structure,” he said at the Reuters Global Investment Outlook Summit in New York.
The wild price swings in August as a result of lower liquidity and higher volatility may have scared some individual investors away from the stock market, which at times may have looked more like a casino, he said.
“And that’s detrimental to the long-term growth of the U.S. because the equity market is a source of capital for companies to grow and there has to be something that re-instills confidence on the part of investors that we are not in a casino.”
Einhorn said one big change in recent years has been that trillions of dollars that are now run through electronic, algorithmic and quantitative investing strategies that react to signals in the market and provide catalysts for selling.
One solution might be for the U.S. Securities and Exchange Commission to reintroduce the so-called “up-tick” rule, which until 2007 prevented investors from shorting a stock at a price less than the last trade, he said. This kept short-sellers from creating a snowball effect when a stock was already in steep decline.
“The SEC has a responsibility to delve into it so we can better understand the sources of this unusual volatility because there is a cost to it, - people leave the equity market and they have less confidence and faith in it as a place to save.”
Reporting by John McCrank; Editing by Alan Crosby