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Confidence, the Capricious Commodity


Just how tough can it possibly be to successfully stage an IPO, at a time when the bulk of trading on the nation's equity markets is automated? And when it will only get more so? The failure of the Facebook IPO has so rattled investors that it has become a totem of their lost faith in the orderly functioning of capital markets.

The Tabb Group, in fact, surveyed 175 members of investment management companies, hedge funds, brokers, exchanges, alternative trading systems and liquidity providers about the after-effects of the botching of that much-anticipated initial offering to the public of Facebook shares.

The survey of large market players found that the delayed and disrupted trading had nearly as negative an impact on investor confidence as the May 6, 2010, Flash Crash.

That does not mean that markets aren't functioning well. To the contrary, at a May 31 Liquidnet breakfast panel on investor confidence, Tabb Group namesake Larry Tabb noted that "the market is so efficient that the incentives to actually provide capital and write research and to actually get people to buy stocks are gone.''

But that isn't restoring faith. Indeed, the host of the panel was Seth Merrin, the founder of Liquidnet, which in the last 12 years has created the most prominent venue specifically seeking to serve institutional investors-such as, quite notably, mutual fund companies. Institutions that want to move large blocks of stock, without being identified or preyed upon. ("Large Blocks Dead? Not at Liquidnet," June 18, 2012)

Investors, he noted, have lost "half their money twice this decade,'' in the dotcom bust and the wake of the credit crisis.

Ironically, three weeks after hosting the panel examining the crisis in market confidence, Merrin disclosed that Liquidnet itself was under investigation by the Securities and Exchange Commission.

Its transgression?

Failing to properly guard information about Liquidnet's institutional customers, when marketing a new service to corporate customers. Information such as average trade size, average volume of trading and issues they showed interest in.

Merrin quickly admitted to the failure and moved to correct it.

But confidence is a funny thing. Once it's gone, it can be awfully hard to get back.