Shutting Off the Stock Market

Close your eyes and try to imagine a world without stock tickers.  What if companies were still required to report their financial information and people allowed to buy and sell stocks, but the publication of up-to-the-second stock prices, index levels and analysis was restricted to once a year?

Ignoring job losses in the financial sector, considerably shorter newscasts and blank newspaper pages stemming from such a drastic move, in the aftermath of the “flash crash” of 2009 and the ongoing turbulence and instability of global markets, this thought experiment elicits interesting observations about the state of our capital markets and its implications for global future economic growth.

Shutting down stock markets is not advisable, nor is the point that an ideal world would not have up-to-the-minute stock updates or 24-hour business television.  Rather, the fundamental question is whether our society’s uniquely obsessive focus on short-term fluctuations of the market is encouraging short-term decision making and fostering a pervasive and damaging negativity that in turn results in a self-fulfilling economic prophecy.

As technology creates new opportunities to process information and the amount of available information increases, hyper-sensitivity and volatility are fast becoming the new norms of the stock market.  The rise of program trading in particular, which uses technical indicators and analysis of quantitative data to make buy and sell decisions, threatens to further speed up the already frenetic pace.

Certainly, new technologies and enhanced access to information have the potential to generate tremendous sums of money and democratize access to market information.  But the real question remains whether or not facilitating “trading for the sake of trading” generates real lasting wealth for the economy taken as a whole.

In order to answer this question, it is important to consider why capital markets exist in the first place.  Fundamentally, the capital markets serve as a link between users of capital (companies) and owners of capital (investors).  Advanced economies benefit from a large, vibrant and efficient capital marketplace because it provides companies with the capital required to grow and create wealth, which in turn increases gross domestic product, increases productivity and raises living standards.  Capital markets are the living, beating heart of a thriving democratic-capitalist system.

Permitting and fostering unnecessary volatility in the market has both damaging short-term consequences for investors and creates long-term impediments to economic growth.  If the capital markets are permitted to become the functional equivalent of a high-stakes casino, investors (institutional and retail alike) will refuse to take such risks.

The implications of this trend are stark: less money invested in the capital markets means less capital for start-up ventures and established companies alike, which in turn limits their ability to make desperately needed productivity gains, create jobs and generate wealth for stakeholders.

Should volatility, irrationality and complexity become the hallmarks of the public market, the net result will be a steady flow of investors out of the public marketplace and into the relative stability of private ownership.  Since private companies earn their profits without the bother and expense of being a public company and the pressure of a fluctuating stock price, the incentives for going public will become less attractive – especially if the markets for private capital investments grow as more investors seek more stable investment returns.  Indeed, the recent trend for many accredited investors towards alternative investment classes demonstrates that this might already be already happening.

If the value of a public capital marketplace is lost, as a consequence, all of the potential future economic value of private companies that choose to stay private rather than risk the cost and uncertainties of going public will be lost for all.  The stakes are high.

If history is any guide, the trend for advanced economies will continue towards ever-increasing complexity.  Given troubling harbingers such as the “flash crash” of 2009, businesses, regulators and politicians need to engage in a serious debate about whether the growing complexities taking hold in the capital markets in the name of short-term financial gain for some will ultimately detract from the market’s ability to facilitate long-term economic growth for all.

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