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.

 

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
News
news
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
News
news
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
lifeAiming to show breasts in a non-sexual way for cancer awareness
New Articles
i100... with this review
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
Life and Style
The designer Veronica Etro (right) and her models enjoy the closing moments of her show during the 2015 spring/summer collections at Milan Fashion Week
fashionVersace at Milan Fashion Week
Arts and Entertainment
Nick Frost will star in the Doctor Who 2014 Christmas special
tvNick Frost, Natalie Gumede and Michael Troughton step up
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

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week