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Needed:  A Public Stock Exchange

Get Thee hence, stock speculator!

September 2008

Private stock exchanges have done a miserable job of controlling stock speculation or catastrophic mob mentality among traders.  Calming regulations are needed on stock exchanges, and the stock gamblers need to be sent packing.  Only a truly public exchange can achieve the stability our businesses deserve.
Over the past few weeks a financial crisis, with its roots in the structure and operation of the secondary mortgage market giants FNMA and FRMC, has rocked the U.S. economy.  The U.S. government has finally realized, decades too late, that the uncertain obligations and guarantees of these quasi-public firms, combined with (intentionally?) negligent oversight by Congress and the natural greed of human beings (in this case lending bankers and quick-buck fellow-travelers) have led to a deep and spreading cancer in the American financial system.  The re-nationalization of FNMA and FRMC – leading perhaps to their eventual dissolution – was the only possible course for the government at this time.  The blame for this development lies both with the Congress and with federal administrations from Lyndon Johnson, who privatized these institutions, to George W. Bush.  While Mr.Bush must bear the heaviest load of blame because the danger signals became clearer on his watch, Mr.Clinton and the other recent presidents could have and should have recognized the folly and danger of implied governmental guarantees that improperly transferred the risk – but not the profit – of mortgage lending from private lenders to the taxpayer.

As we have seen, this self-inflicted financial crisis in mortgage lending naturally caused a crash in the housing market and quickly spread throughout the banking and insurance industry.  And just as quickly, it brought on havoc in the stock market.  While the need for crisis-preventing and crisis-dampening mechanisms are evident in many aspects of financial operations and markets, this note will concern specifically the stock market.

On a stock exchange, such as NYSE, the combined wisdom of investors theoretically evaluates a company's present and potential assets and obligations, and reaches agreement on the value of a share of its stock.  To be sure, there's some of that going on.  But on a stock exchange, as we have seen repeatedly, psychological factors often take precedence over objective assessment.  Uncertainty, fear, and sometimes outright panic may grip investors.  Like a pandemic flu the bug spreads throughout the exchange, and from it to stock markets around the world.  Before long, mass psychology is operating, and as in a self-nourishing positive feedback loop investors soon act like an irrational mob, feeding their own fear with massive sell-offs.

Is this actually the way we ought to make vital financial decisions that affect the future of companies and jobs, or the safety of pensions?  What we have is a system where gamblers (AKA speculators) are welcomed into the stock exchange – like a fox into the henhouse, there to run an organized betting operation on the future of companies and on the nation's economy.  These gamblers have no interest in supporting and stabilizing companies, the business economy, or our financial system.  They don't care whether stock prices go up or down, as long as they have guessed right and placed the right bet.  These gamblers are a destructive force in our economy, and they've nearly destroyed our nation several times.  Is this system the best we can do?

No, it isn't.  This merger of a presumably honest stock exchange with a gambling operation, which is unfortunately the model of most stock exchanges, is a model that we can't be bound to any longer.  The cost in ruined lives is too great.  The mission of a stock exchange ought to be positive, analytical, facilitating, supportive of companies and of the economy.  But instead it appears that the exchanges, such as NYSE, exist for profiteering by the gamblers, who do not have the economy's welfare at heart.  I do not propose to ban gambling in stock.  But it's past time to get the gambling operation out of the stock exchange:  let them print their own scrip to gamble with, or bet on the market in Las Vegas or at an internet betting site.  They have no business getting their hands on actual stock.  It's time – it's past time – to have a stock exchange that is not a gambling hall.  Since such an exchange would not be designed to make money by favoring maximum trading, it needs to be a public exchange.

I call on the Congress to establish a U.S. Public Exchange, initially as a stock exchange, and later, if the need is felt, to trade other financial instruments and commodities.  The purpose of the U.S. Public Exchange would be to improve financial stability of listed companies by reducing stock volatility, i.e., to facilitate fair pricing and trading of stock while discouraging speculation in stock values.  The "USPE" should be a non-profit public service, fully funded through listing and trading fees.  I won't propose a specific structure for this organization; one possibility is as a branch of a reorganized Securities and Exchange Commission.  And it goes without saying (doesn't it?) that close oversight and accountability of both managers and overseers is a sine qua non.

I suggest that two features could be keys to reducing speculation and volatility at the U.S. Public Exchange:  A delay built into a transaction order, and a minimum stock holding period.  I suggest, as examples:

  • A 48-hour delay before actuating a purchase or sale order.  Thus, if a stock is bought on Monday at 10 a.m., the stock is actually transferred to the buyer (and paid for) on Wednesday at 10 a.m., at the stock price then obtaining.  This feature should lead to a reduction in stock gambling, since the buyer/seller will not have precise knowledge of the buy or sell price.  (A refinement on a buy could be that against the option of a six-month freeze on resale of the stock, the stock may be bought immediately at the current price.  This would give genuine investors better control over their purchase price than short-term speculators.)  Naturally, variants of these suggestions may work as well.
  • A minimum holding time, say 30 days, on all purchased stock.  Thus, on this same Monday, if you've held 50 shares of "A" for 30 days and you now buy 100 more shares, tomorrow – if you decide to sell – you could sell 50 shares of "A", but the remaining 100 shares you couldn't sell until you've held them 30 days.  This feature, or a similar restriction, should also promote stability of value, and help to inure stocks against fluctuations brought about by speculation.
The USPE, as I see it, should list only companies incorporated in the U.S., and listed companies should not be traded on other exchanges.  And what of the private exchanges, like NYSE?  We would wish them good luck; companies that don't mind speculation in their stock would continue to trade there, while those that seek stability would move to the public exchange.  But frankly, NYSE and similar stock exchanges have had a century or more to get it right, and they haven't got it right.

If they fall, they fall on their own sword.

Note: A later (2011) note on this subject is here.

© 2008 H. Paul Lillebo

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