Besides ensuring orderly pricing in equity markets, outflows from stock mutual funds that have occurred every single week in the four months since the May 6 Flash Crash, for estimated redemptions totaling more than $50 billion, are causing grave concerns at the Securities and Exchange Commission.
That was one of the startling messages from SEC Chairman Mary Schapiro in her speech yesterday before the Economic Club of New York.
“Retail broker-dealers have told us that individual investors have pulled back from participating in the equity markets since May 6. Indeed, according to mutual fund data, every single week since May 6 has seen an outflow of funds from equity mutual funds,” Schapiro said. “The trend is troubling.”
Data on equity fund flows from the Investment Company Institute shows outflows of $24.70 billion in May, $5.64 billion in June, $10.43 billion in July and $11.62 billion in August—for total outflows of $52.39 billion in the past four months. As of July, total assets in equity mutual funds stood at $4.92 trillion. By comparison, in the 11 weeks leading up to the crash, equity mutual funds took in $26.6 billion.
Schapiro admitted that “there may be a variety of reasons for reduced participation in the equity markets”—alluding to the drag on the markets by continued U.S. unemployment of 9.6% and the European debt crisis. However, echoing a recent report from Ned Davis Research, the SEC chairman lay much of the blame for the massive outflows on the credit crisis.
As a result, besides revisiting circuit breakers, the SEC is considering requiring high-frequency traders and dark pools to bring liquidity to the market in times of great stress.
Schapiro noted that a decade ago, 80% of U.S. equities were traded on the New York Stock Exchange, while today, the NYSE handles a mere 26% of that volume—with the balance split among 10 public exchanges, 30 dark pools and more than 200 proprietary trading desks at broker/dealers.
“Nearly 30% of volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public. The percentage executed by these dark, non-public markets is increasing nearly every month,” Schapiro said.