David Swensen, the legendary chief investment officer at Yale University, says “America’s equity markets are broken,” rigged in favor of short-term players and against individual investors.
In an op-ed in Thursday’s New York Times, Swensen and co-author Yale Law Professor Jonathan Macey, argue that “individual investors, trading through brokers like Charles Schwab, e-Trade and TD Ameritrade, suffer first as the brokers profit from selling their retail orders to high frequency traders and again as those traders take advantage of the orders they bought.”
The authors urge the SEC to approve an application by IEX to become a national securities exchange.
IEX is headed by Brad Katsuyama, the hero of Michael Lewis’s book “Flash Boys: A Wall Street Revolt,” which focuses on the dangers of high frequency trading and Katsuyama’s possible solution: an online securities exchange that will slow trading by all participants – including high-frequency traders — by 350 microseconds.
High frequency traders would no longer be able to snap up shares before other orders are fulfilled, which creates disadvantages for other investors, forcing them to pay higher prices on purchases and accept lower prices on sales.
“Exchanges are the key to price discovery – the determination of the true price of an asset — because the National Market System requires brokers to route trades to the exchange displaying the best prices,” write Swensen and Macy. “Right now, brokers and their larger exchange competitors can ignore IEX and other regulated alternative trading platforms, even if they display the best prices.”
IEX’s competitors such as the NYSE, Nasdaq and BATS “cater to the interests of high-frequency traders, “ write Swensen and Macey, noting that those traders typically account for more than 50% of all trading volume.
Those exchanges, along with high frequency traders like Citadel — in what the op-ed authors call “an unholy alliance” — have petitioned the SEC to reject IEX’s application. They want to “block IEX from competing when they collectively own 10 of the 11 national stock exchanges,” write Swensen and Macey.
But the authors themselves are not without their own conflict. They note that Yale has a “small indirect investment” in IEX.
Yale’s endowment, by the way, has had a stellar investment performance under Swensen, returning 13.7% annually over the past 20 years through June 30, 2015 – compared to 8.5% average for college and university endowments. During that 20-year period, endowment assets swelled from $4.0 billion to $25.6 billion.