Sunday, 1 July 2012

What is the business of an exchange?

Outspoken billionaire Marc Cuban is an US investor and participating in one of my favourite TV series "Shark Tank", where founders pitch their ideas to a panel of judges who put their money where their mouth is. Parts of episodes are easily available on YouTube. Cuban can come across as rather arrogant, but he also did quite a few very fair deals in the TV show.

Marc Cuban spoke out against High Frequency Traders (HFT) in a recent interview in The Wall Street Journal. Some snippets from this article:

Concerns about the impact of rapid-fire trading on the markets has ramped up of late, especially after technical glitches at Nasdaq fouled up Facebook’s trading debut. Last Wednesday, market honchos such as NYSE Euronext Chief Executive Duncan Niederauer were grilled by lawmakers in a hearing about the current state of the market. One clear message from the hearing was that a proliferation of computer trading and opaque markets has hurt investor confidence.

Mark Cuban:

"That got me looking further into issue of high-frequency traders. They are the ultimate hackers. They’re running software programs that have one goal, and that’s to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world’s trading platforms, that is a recipe for disaster."

"Public companies need to figure out what business the exchanges are in. Is the market supposed to be a platform for companies to raise money for growth and to create liquidity and opportunity for shareholders as it has been in the past? Or is the stock market a laissez-faire platform that evolves however it evolves? The missing link in all the discussions is: What is the purpose of the stock market?"

Cuban did write about this last issue in the past on his own blog:

"However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders.  The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce."

The number of listed companies in the US did shrink markedly in the last decade. Is it possible that all the financial engineering (derivatives, hedge funds, HFT, etc) has not added any value at all, in the contrary?

This is all very relevant also for Bursa Malaysia. Who do exchanges actually serve, who do they want to attract? Traders only interested in making short term profits, or genuine investors? And what kind of companies will they attract?

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