The sooner stock marketsgo global, the better

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There are two justifications for stock markets - in addition to their entertainment value as a large casino for high rollers. They enable companies to raise needed capital for investment and they allow people and institutions (such as pension funds) to invest for a rainy day. If they worked perfectly efficiently, equity markets would serve the useful purpose of channelling a society's unproductive capital (savings) into financing productive industrial and commercial enterprises. So when we hear that the London and Frankfurt stock exchanges are to merge, and perhaps take New York's hi-tech bourse, Nasdaq, with them into the bargain, the proper test for disinterested observers is to ask how well these two functions will be served under the new arrangements.

There are two justifications for stock markets - in addition to their entertainment value as a large casino for high rollers. They enable companies to raise needed capital for investment and they allow people and institutions (such as pension funds) to invest for a rainy day. If they worked perfectly efficiently, equity markets would serve the useful purpose of channelling a society's unproductive capital (savings) into financing productive industrial and commercial enterprises. So when we hear that the London and Frankfurt stock exchanges are to merge, and perhaps take New York's hi-tech bourse, Nasdaq, with them into the bargain, the proper test for disinterested observers is to ask how well these two functions will be served under the new arrangements.

The association of small fund managers and brokers has already criticised the proposal to merge the London and Frankfurt exchanges, but their views fall into the "they would say that, wouldn't they?" category, for the point of creating larger, regionally - or even globally based markets, is to reduce transaction costs, in part by limiting the role of intermediaries. Providing job security for redundant service providers is not one of the principal purposes of stock exchanges.

The first recognisable stock exchange opened in Antwerp in 1460, to finance Dutch overseas ventures. That outward-looking function continues now, when the needs of companies and investors have become truly global. What we think of as being a shocking subsuming of our own European and American markets into the new iX European exchange will soon seem provincial itself. Global business will demand global markets. Individuals will find new ways of learning about investment opportunities, and they will want to buy and sell shares in industries based anywhere, and at any time. Electronic trading will make that possible, and single markets will ensure that prices are immediately responsive to changes in supply and demand.

The worry, of course, is that as we move into a world of giant equity markets and essentially location-free trading, who will regulate and who will tax the new super markets? National government, and even multi-nations ones like the European Union, have a big task ahead of them.

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