Here’s Six Ideas to Fix the Market

Disclosure of Short Positions. Large hedge funds are required to disclose their “long” positions if they exceed the threshold of owning 5 percent or more of a company’s stock. Such disclosure is not required for short positions. At all. Shouldn’t there be? If we as a society believe that transparency is important in order to understand who is buying up stocks, it makes sense that we also want to know who is betting against them. Some people believe that short selling should itself be banned; others believe it serves an important police role by encouraging shareholders to investigate companies for fraud, harassment, or simple mismanagement.

The Cons: If short sellers were forced to disclose their bets, they could have difficulty building meaningful positions. Shorting a stock can take some time, and building the position could turn them into targets for investors who may have brief pressures on them, much like we saw last week.

End private meetings between corporations and large investors. It is illegal to share important information that is not made publicly available to all investors. But large investors are constantly traveling across the country to visit CEOs and privately inform them about their business. The private investor cannot attend these meetings. While most executives take care not to spread the word about upcoming profits or a merger, it’s hard to believe that big investors would spend the time and money on these meetings if they didn’t believe it was giving them an edge they could couldn’t not get otherwise.

The Cons: Companies often say they want to hear from their biggest investors and get feedback on their performance. Some large investors also say that given the amount of money at stake – especially when making a long term investment commitment – they want to get to know the management team in person.

Access to private investment for those who are smart and not rich. The Securities and Exchange Commission says only “accredited investors” can put money into private investment vehicles like venture capital and private equity funds, which often produce some of the greatest returns. In the past, the activity as an accredited investor was measured by assets. The SEC recently changed the rule so that people with significant financial experience can invest even if they don’t meet the asset thresholds. What about a test for anyone wishing to become an accredited investor, like an investing driver’s license? This would create a fairer system and ensure that anyone investing money in the riskiest vehicles would have the financial literacy needed to fully understand the risks.

The Cons: Even the most discerning investor sometimes loses, but someone with a lot of wealth has a cushion. Someone with less to lose may be forced to rely on the social safety net when an investment goes wrong. And a test of financial literacy for everyone could mean some of the wealthiest investors fail or pass the exam to prevent money from investing in risky but important early-stage companies.

Finish paying for the order flow. When Robinhood, the brokerage app, was first introduced, its biggest innovation was eliminating trading commissions. The move was a huge success, and the company grew so fast that other brokerage firms eliminated their fees as well. How do you make money? Robinhood’s unique insight was that market makers could be hired to execute trades for it. Market makers, in turn, make a profit for the fulfillment of every trade and knowledge from the flood of data. In Robinhood’s case, Citadel Securities conducts the majority of its business and is its largest source of income. This has raised questions about conflicts of interest and has created suspicion about the system. Ending the practice could give retail investors more confidence that the prices of their deals reflect prevailing conditions on the stock exchanges rather than private agreements between brokers and other parties.

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