Anthony Hilton: What is the stock market for? Mainly enriching traders and middle men

Vince Cable was told that no new capital had been raised in the stock market for 20 years

Economics textbooks tell you that the purpose of a stock market is to channel savings into productive business. It may indeed have worked like that back in Victorian times, but it is not how it works today. At a dinner on Wednesday night sponsored by the law firm Evershed's, Professor John Kay, who has made a study of the functioning of the markets at the request of the Business Secretary, Vince Cable, below, pointed out that there has been no net new capital raised in the stock market in the last 20 years.

There had been some new issues where the founder of a business wants to get cash out, and there had been some rights issues to provide new capital for businesses which had got into difficulties. But this and other new money was more than offset by the shrinkage elsewhere caused by companies being taken over, or going bust, or of others buying back their own shares rather than investing to grow their businesses. Separately, lending support to what he says, the National Association of Pension Funds recently provided figures to show that only 15 per cent of the new money saved by its members was being channelled into the UK equity market. The rest was going into bonds or overseas.

But if the stock market is no longer raising capital for business, what is it for? In theory it allows investors to become shareholders in existing businesses and share in their profits. But this does not work either, because as Professor Kay further pointed out, the vast bulk of those profits are creamed off by an army of intermediaries: fund managers, brokers, independent financial advisers, investment consultants, platform providers, custodians and a string of others. They make a comfortable living, but the investor rarely does. Indeed, others have calculated that private pension plan returns would be a third higher if only the fund managers charged at the same rate they do in Holland.

And the other market participants are traders, using computers to buy and sell within a millionth of a second so they can exploit the most minor and shortlived movements in prices. Again, they make a comfortable living. Again, it is hard to see what value they add, or how they further the primary purpose of the market. Arguably they work against it by adding to the volatility which scares off ordinary people.

Market professionals have different priorities from ordinary investors, which is why the pressure on companies is for short-term results. This means executives will cut back on research and development, think twice about making big investments which won't deliver an immediate pay-off, and will sell or close down underperforming businesses rather than spend time trying to turn them round. If you want to know why the British economy is unbalanced, then this is at least part of the reason. The financial tail wags the dog.

Unfortunately, though great on diagnosis, Professor Kay can't think of any short-term fix. The only real hope, he says, is for investors and pension fund trustees to wise up to what is happening, understand how it is not in their interests and demand a change in City behaviour. It is a long-term project.

Meanwhile, what is the purpose of the stock market? Professor Kay pauses and then says that perhaps its main role today is to lay down and enforce good corporate governance.

 

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee