Taking Stock of Stock Exchanges

23 Nov, 2002

It does not need a Marx or Mao to define and recognise that the stock market is the most visible sign-post of cross-capitalism, in its full stride. Communism has collapsed vividly in may parts of the world or is only a ghost of its former self. The generational changes sweeping China, and soon in Cuba when Fidel Castro fades away, will ensure that the last citadels of communism will crumble into its history books; not long from now.

It is ironic, therefore, that capitalism's most vibrant symbols i.e. stock exchanges, should remain state-owned and state-funded. In many parts of the world , including in this region, its viability is suspect. It has become more of a national carrier approach; where you do not, then, challenge its commercial basis as to relevance or need. You tend to safeguard it zealously, as an expression of national economic pride. Thus stock exchanges remain entrenched like a bureaucracy that become larger than life. Some of the exchanges perform so poorly that if they were in private sector, they will qualify for euthanasia. Why now, as in the Western world, should stock exchanges not have cross-border mergers i.e. combine their capabilities and investments to produce something more viable in scale and profitability terms. Once you start attaching emotional and jingoistic values to a commercial structure, then rational discussions and debates will get stifled and that may not be for the good of that particular entity.

The secondary stock markets themselves in the OECD countries have been known for their popular indices, be it Footsie, Dow Jones, Nasdaq, S&P, Nikkei, DAX, CAC etc. Over the years, they have gone up and down like veritable yo-yos. These cyclical swings have made stock markets the ugly pock-marked face of capitalism. This is best illustrated by the fact that, over the years, the stock market may have produced many millionaires out of those that had little more than petty cash. But it has pushed people into penury from the riches that they were originally endowed with. Of course, these mature markets are deep, liquid and except in the case of Nasdaq, do not witness sharp swings and gyrations of much magnitude; on a daily basis. But cumulatively, in a year, they have wiped out chunks of capitalisation; to the horror of hapless investors.

But the stock markets have also produced the likes of Microsoft or IBM and others who, from the time they were first established and listed, have appreciated multi-fold in value and therefore rewarded the original shareholders / risk-takers considerably and consistently.

In a sense, the stock market capitalism, is very much a western invention, embraced by countries around the world, as good pillars of economic foundation similar to the banking and regulatory systems. That premise has never been questioned but accepted implicitly, just like democracy. Ultimately these are all systems and inventions that were not inherently natural phenomena or even necessities in the evolution of an economy. It is not that you cannot have good governance without full blown democracy. Similarly, free enterprise (the more benign word for capitalism) can co-exist with or without secondary stock markets.

Unless these invented systems are professionally run and enable stakeholders to exercise their choice freely and readily; they may become trappings for vicious cycles - economic and political. Excepting for a few, most stock markets in the developed world do not have depth, have had severe mishaps, sharp practices and generally suffer from sheer lack of vibrancy. This, despite, the best efforts and the considerable expenditure incurred in creating infrastructure.

The situation is no different to every small country wanting to have its own national carrier; even though its smallness would suggest that, it would be better off being part of a larger regional aviation network. Apart from unjustifiable economies of scale, it is necessary to ensure, before one sets up a stock exchange that there are atleast a few hundred companies from within the country or from the region that are willing to list their shares. Similarly, there should atleast be a few hundred thousand shareholders willing to buy and sell a few times in a year to create critical mass; to support operational viability of exchanges.

Besides, these days, with the electronic means of trading and the versatile technology available, physical trading floors are becoming anachronisms i.e. costly symbolism that can degenerate into grandiose grand-standing that will not reap or realise full potential or benefits.

Like the democracy, the structural elements of stock markets also need to be questioned dispassionately i.e. are they alien to the domestic mechanisms of ethos of a country? Should one be perhaps a little more flexible than importing, wholesale, regulations and formats from abroad; just because global stock exchanges are willing to sell their technology and trade practices? Presidents of exchanges in different parts of the world, have more persuasive power and prevail over domestic conventional wisdom in many, in the developed world. Obviously these exchanges are not making money in their own countries and are quite happy to take up contracts to set up exchanges. The stock exchange technology and the operational know-how is now common place and available in the Third World. Home-grown versions in some of the leading developing countries would fit the bill just as well. But then, that is not as fashionable as saying that NASDAQ or NYSE are going to power your stock market engine. It is wise to be wary of falling prey to flattery from salesmen and paying the price for it, after they have left!.

It is prudent for developing countries to emulate the best practices from the Western world in terms of transparency, disclosure and corporate governance. But they need to critically examine whether it suits the local idiom and then introduce them sensibly and gently. Ethical conduct and good practices have neither a nationality nor are they alien to any part of the world. They may need to be adapted / refined while ensuring that the core remains clearly intact. However, in embracing them wholesale with all their trappings, is like playing favourites or showing a weakness for fashion labels. This is more like having a yoga teacher in Hollywood or wearing a Gucci label; albeit fake. The veneer may appear impressive but if you scratch it, the underlying may not stand up to much scrutiny!

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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