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
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsSchool leaver's pic YouTube video features staging of a playground gun massacre
Travel
travel
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
PROMOTED VIDEO
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
Sport
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
News
Morrissey pictured in 2013
people
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Travel
travel
News
Robyn Lawley
people
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
people
News
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
News
people
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
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

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star