There are things in life that you don’t think about because they are just there — like seasons, banking fees, traffic lights…and stock exchanges. Statements or interviews from trading floors of stock exchanges are a common occurrence on the financial news. We’ve been taught that stock exchanges are a free marketplace, where brokers and traders buy and sell shares. That’s the way it works. That’s the way it’s always worked. In reality, this market is broken. Let me explain why…
Don’t get me wrong, I’m a strong believer in shares as a vehicle for businesses to raise capital, and for investors to invest in companies they believe in — to participate both in the success and risk of a business. This is a very simple contract between parties where there is, ideally, a mutual benefit.
Companies with transferable shares date back to classical Rome. Then the Dutch East India Company became the first company in the early 1600s to issue bonds and shares of stock to the general public. While ordinary shareholders did not have much influence on management decisions, or even access to the company’s accounting statements, shareholders were rewarded well with high dividends for their investment.
But where have we ended up after decades of government interventions and unilateralism? Instead of having a free, transparent, international share market, we have ended up with 260+ (!) stock exchanges world-wide. This is 1.3 exchanges per country! Even small countries like Bosnia afford the luxury of maintaining two exchanges. This reminds me of the times when many countries had their own airlines, largely for prestige reasons, until they started to struggle to compete and ended up collapsing or merging.
Rag Rug instead of a global market
While we can understand that states try to control their national stock market with their own exchanges, the setup is highly inefficient and a massive burden for business. Businesses are forced to list on their national stock exchange even if their main markets are somewhere else. Businesses are force to have costly dual or cross-listings if they want to make shares available to shareholders in other jurisdictions. While the general concept of a share is globally very consistent, each stock exchange requires proprietary data exchange formats — making cross-national trade across stock exchanges a nightmare. The biggest antithesis is: while our economy is global, our “global” stock market is not global but a rag rug of national solutions.
Door closed! For large companies only!
As a lot of exchanges are owned by for-profit organizations, listing a business is an expensive endeavor. While most companies world-wide would like to get access to shares as a very established capital raising instrument, only 1% of companies are large or profitable enough to get listed. 1%! But does this mean that an investor can freely invest in all of these public companies? No, as this depends on which exchange the company is listed on and whether the shareholders’ broker or bank offers them that specific option. Buying shares from companies in countries in Asia, Africa or South America? Unfortunately not available to European retails shareholders. Trading directly at an exchange as a retail investor? Not possible in a lot of countries due to national regulations. Shareholders are forced to use a bank or a broker to trade shares of companies they would like to invest into. And have you ever considered why it takes days or weeks to settle a trade? Think of all the middlemen involved like the brokers, transaction banks, exchanges that work with out-dated interfaces . This results in time delays as well as ridiculous fees. Ever thought why you can’t use your crypto-currencies on the majority of exchanges? Don’t you think that it should be possible that you decide on the currency for your investments? Given that servers run 24/7 and other financial services are available around the clock, isn’t it bizarre that trading ends at the end of the day to allow banks and exchanges to reconcile their positions? And if it is a free market, why can exchanges decide to stop trading if a share is under pressure?
A matter of justice
Stock exchanges also contribute to the unequal distribution of wealth across the globe. This is because the system excludes large parts of the world’s population by either not making shares available in their domestic market or by providing entrance barriers like a trading account. While professional investors have all the tools and privileges for high-frequency trading, many people don’t even get access to the stock market at all.
Is this all set in stone? Can we change it? We can. I believe that the global stock market can become a decentralised, supranational, free marketplace for any business and for any investor powered by blockchain.