Finance & Economics Department

Professor Farrokh Langdana was featured in Arrive, Amtrak's magazine for the Acela northeast train corridor. "Once the economy gets traction, because never in history have we printed so much money without inflation, we will need to suck the money back in, or we will see inflation. It's like toothpaste - once out of the tube, it's hard to get back in," says Langdana in interview. See article.

From The Wall Street Journal:

Trading in dark pools and other off-exchange venues has been rising in recent years. About 14% of all stock trades in the U.S. now take place on dark pools, up from 3% in 2007, according to Tabb Group, which tracks electronic trading. Total trading away from exchanges hit a record of 37% of all trading volume in January, according to NYSE Euronext NYX -0.65%.

A rise in off-exchange trading could hurt investors, some said. A 2010 study by Rutgers Business School professor Daniel Weaver found that a NYSE-listed stock with 40% of its volume trading in the dark costs investors about $4 million per stock a year.

The reason: With more investors trading in the dark, fewer buy and sell orders are being placed on exchanges. That can translate into worse prices for stocks, because prices for stocks are set on exchanges.

Exchanges have been scrambling to turn the tide. One tactic in recent years has been to cater to high-frequency firms in order to capture the rivers of buy and sell orders they provide. With more orders on the exchanges' books, investors might get better prices and find it easier to trade, they hoped.

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The global economic crises of recent years has, more than ever before, exposed the stark contrasts between dynamic emerging markets and those economies that are stuck in the grips of recession, financial turmoil, and economic stagnation. On one hand, China, India, Malaysia, and Singapore, as well as many countries in the Middle East and South America continue booming, despite decreased demand from the ruined west. Conversely, while Europe and the U.S. are struggling to stimulate sustained growth, Japan remains stuck in a prolonged economic stagnation that began in the early 1990’s, and there are still parts of the world yet to experience a rapid economic modernisation. Why is it that some countries are experiencing robust economic growth, while others are lingering in stagnation and endless cycles of boom and bust? Business Tianjin talked to Dr. Frank McIntyre, Assistant Professor of Economics at Rutgers Business School, and a specialist in developing nations and global economics, to find some answers to this economic paradox.

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Finance and Economics Professor Daniel Weaver participated in a panel discussion hosted by The Wall Street Journal on the subject of financial markets. The following are exchanges between WSJ and Prof. Weaver.

WSJ: What does high-frequency trading mean? What are these firms doing, and to what extent have they replicated the role of floor traders?

Prof. Weaver: The average high-frequency trader's profit is 10 cents on 100 shares traded. When you have a machine, it becomes scalable and very profitable to make very small profits per trade.

WSJ: How does it affect individual investors?

Prof. Weaver: Whether or not there is more volatility in the marketplace is the issue. It's not clear whether more volatility is being caused by high-frequency traders. Certainly there are tighter spreads, more liquidity. But there's more price impact, and there may be more volatility in the market as well.

WSJ: Should retail investors be concerned?

Prof. Weaver: They should stay away from short-term trading strategies. They are going to go up against computers and lose. But put it in perspective. IBM shares traded at about $80 on Feb. 28, 2006. If you ended up paying an extra 25 cents a share due to volatility, then you paid an extra 25 cents per share. Over the next five years IBM doubled, which impacts returns much more than the 25 cents. Investors should worry about the long-term price appreciation of stocks, not small volatilities.

WSJ: What about the impact high-frequency trading has on exchanges' trading networks?

Prof. Weaver: We have to worry about stresses on the system. The Tokyo Stock Exchange had to shut down twice in the past six years because their systems could not handle the volume of traffic. As high-frequency traders scale up, we're going to need more improvements to the structure of exchange backbones. If we don't have that, we could have a crash precipitated just because the exchanges couldn't handle the message traffic.

WSJ: Electronic traders are often portrayed as secretive and predatory. What can they do to improve their public image?

Prof. Weaver: If they have nothing to hide, then show us the data. It'll have to be coded so that we can't identify any individual firm and replicate their trading activities. But there are ways, which Nasdaq has done, to release the data without the high-frequency-trading firms fearing that their trading strategies can be discerned by looking at the data.

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Though often criticized as frivolous and lacking economic benefit, new research by finance and accounting professors at Rutgers and Emory universities' business schools finds that class action lawsuits are a strong deterrent to misrepresenting corporate financial results and other wrongdoing.  And, in many instances class actions are a stronger deterrent that SEC enforcement actions.

"Our research found statistically and economically significant deterrence associated with both SEC enforcement and class action lawsuits," said Simi Kedia, Ph.D., MBA, associate professor of finance at Rutgers University Business School in an interview with The Investor Advocate.  "We looked at firms in the same industry as the enforcement target and found that the average peer firm subject to SEC action and/or litigation reduces discretionary accruals (i.e., reporting as sales transactions for which payment has not been received) equivalent to 14 percent to 22 percent of the media return on assets in the aftermath of such enforcement."

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Demographics are destiny

The year 1948, just after the second world war, may seem like a different era. In fact, alternative yields from fixed income of 60 years ago were comparably meagre. The prime rate then, at 2% in August 1948, was lower than it is today, at 3.25%.

Or one might argue that the structure of American retirement investment funds has radically altered, shifting from corporate pension plans toward self-directed 401(k) vehicles and Individual Retirement Accounts. Do these contemporary structures manoeuvre savers into stocks?

The opposite is more likely. These 401(k)s offer employees a menu of choices, including equities, bonds and money market funds. Investors can choose for themselves, thereby controlling their own cash positions, unlike the traditional pension plans of 30 years ago.

Mutual fund managers, by contrast, rarely keep more than a modest percentage in cash. John Longo, a finance professor at Rutgers Business School and chief investment officer of the MDE Group wealth management firm, says: “These investors, who generally have no financial training, are still responsible for managing their retirements. Typical investors lack good advice and are more likely to be subject to psychological whims. That means they get nervous when the market goes down and sell.”

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The best thing to be said of the recent stomach-churning turmoil on Wall Street is that it’s taking place in August, a time of year when many people are lounging at the beach or camping in the woods and not paying attention to stocks. But for everyone else not on a ‘stockation,’ watching the markets rise and fall like giant ocean swells has been an unnerving experience that some finance professionals worry could reshape investor behaviour for months and years to come.

“There’s a different dynamic now because of the pervasiveness of high-frequency traders and hedge funds,” says John Longo, chief investment strategist at MDE Group, which manages USD 1.3 billion in assets. Longo, also a finance professor at Rutgers Business School in New Jersey, adds: “The down-5% one day, up-5% the next day volatility wouldn’t have happened in the past.”

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Finance and Economics Professor John Longo was recently interviewed on Bloomberg Radio. Please click here to listen to the interview.

Businesses aren’t spending for the same reasons families are canceling vacations and delaying the purchase of a new minivan: the future is scary.

"For companies, the outlook has been bleak," said Farrokh Langdana, Rutgers Business School professor of finance and economics. "They’ve been sitting on sacks of money for a while now because there’s uncertainty."

Langdana said companies are unnerved by possible costs of tax changes as well as new regulations that add to expenses. The lack of spending by businesses is in itself a drag on the economy, which poses a chicken and egg paradox, according to experts.

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