• Gary Wright, CEO at B.I.S.S. Research


• 06.07.2015 01:00 am
Stock Markets

As a long serving employee in the City and a former member of the London Stock Exchange I have been watching the many changes that has forged todays Stock Markets. I can not say in all honesty that todays stock markets are better or offer listed companies, investors or society what is expected. The name Casino has been levied at todays Stock Exchanges and having given it some deep thought I have to concur.

As we know the London Stock Exchange emerged from the 17th century coffee houses where people congregated to invest in various enterprises . Overtime the chances however of making good and sound investments was matched by those that committed fraud and theft. So rules were created to protect the investors and this eventually became the Stock Exchange.

It had a membership of individuals that were authorised to deal with client investors and a rule book that gave protection but also became a badge of respectability for members.

The rule book had very few rules that were accepted and easily understood. All the rules were about client and their asset protection. Although occasionally there was a villain of the piece they were quickly ostracised by the members eagerly protecting the Stock Exchange reputation but also theirs. 

Leap forward to 1986 and the individual membership was replaced by Corporate under the deregulation into dual capacity we call "Big Bang". Now Banks mainly called the tune and of course the rule books were almost completely rewritten. One can argue if the new rules were actually better than those replaced.

Dual capacity meant that Jobbers (Now called Market Makers) could deal with clients and Brokers could use their own money to deal on their own behalf. In essence back to the scenarios similar to that when Wall Street crashed.  We can also debate why this was done? Also why did anyone think the Stock markets would act any differently once clients and proprietary assets were merged? This debate is ongoing today and I personally struggle with todays reasoning!  

Through the nineties we witnessed the emergence of the Internet and the growth of PCs in business operations. Spread sheet programmes were used to manage risk and no problem with that but then morphed into creating a range of OTC. As we know this was badly managed and to this day regulators and banks struggle to control it.

Derivative financial products today wag the Stock market dog and allow massive exposures for little capital outlay. It in effect puts into the hands of individuals what in the past required significant banking capital. The technology required to play the game today is also within the reach of individuals. We can call them day traders.

Day traders are the tail wagging the Stock Exchange dog. Banks by and large also facilitate this activity because they too make money from it. However what was once a regulated Stock Market where access was limited is now in effect back to the 17th Century coffee houses. Why?

We can now turn to the politicians and regulators. In Thatcher's Government they implemented "Big Bang" at the time when Privatisations were a key capital raising benefit following the seventies oil crisis and a decade of economic and social unrest. Thatcher wanted to protect the City and its reputation as a major international capital market. In effect she open the Banks doors and the flood gates of capitalism. The USA watched and supported the experiment and they followed suit as did other countries in due course.  

The politicians wanted to create competition to the Stock Exchanges with a laudable view to cut the spreads between buying and selling. Competition sounds the right course to take to achieve this. It has succeeded but at a price!

Now we have a hotch potch of different trading venues that offer access to FS firms of many types. This has left a lack of transparency to the investor and a much harder task for the regulator.

There is of course technology that provide all types of solution to the problems but they are all at a very high price. Also the technology has a moving target to hit as the structure of todays capital markets was not designed but more evolved from events and political will. There are clear holes in the markets where we see some pretty bad things happening and where there looks to be some rather shoddy management. Its really quite easy now for the fraudster's to make merry.

The various private and public commercial networks also play a part creating the environment where a level playing field is harder to create.

The Internet is actually been very badly abused by industry and those major corporations that use it for their own purposes. They use it to maintain their position and control. So we have the Internet that was designed as a point to pint communication now covering the world by a series of hubs. Some like Amazon are commercial shopping warehouses whilst others are Banks controlling access. Many more exist if you think about it.

So what of the future?

Well we are already seeing massive change. Peer to peer lending looks like a modern version of the 17th century coffee shop. E-Bay looks like a Stock Market for people. Blockchain technology is a distributed ledger creating the potential for businesses and individual to bypass industry hubs and become a trusted source. SMEs take note!

All this undermining the existing players in markets structures and infrastructures. Its enabling the foundations of banking businesses to migrate away to alternative suppliers. Market liquidity is now available in a global market not be commercial designed markets. Payments and distribution of assets are now much easier and cheaper opening up peer to peer business.

The current players has lost the trust of society and society is showing that its will to go its on way. All this is not unusual or historically different to anyone that lived and supped in a 17th century coffee house