Public stock markets may be so last century, according to John Kay, UK economist and author.
In New Zealand last week on a book promotion tour and speaking engagement for the local CFA Society, Kay said the inexorable rise of technology-driven trading could make traditional share markets such as the NZX extinct.
“[Financial technology] calls into question if the future lies in public markets,” he said. “Public equity markets could soon be seen as 20th Century institutions.”
However, Kay labeled high-frequency trading, which is transforming global share markets, as the most useless financial innovation yet developed.
High-frequency trading is just one symptom of a deeper malaise in the global financial services industry, he said, which has become disconnected from its original social and economic purposes.
Kay said finance provides society with four important services: a payments system; wealth management; capital allocation, and; risk mitigation.
“But over the last 30 to 40 years the financial services industry has moved from a relationship-based business to one focused purely on trading,” Kay said. “It trades with itself, talks to itself, and judges itself by its own standards.”
In his latest book, ‘Other people’s money: masters of the universe or servants of the people?’, Kay details how finance evolved into its current bloated state and how it might be cut back down to size.
“More regulation isn’t the answer,” he said. “In fact, regulation has become part of the problem by generating more complexity. Any change has to address the structure of the financial industry.”
In ‘Other people’s money’, Kay writes reform must tap into “an entirely different regulatory philosophy”:
“We need to give attention to the structure of the industry, and the incentives of the individuals who work in it, and to address the political forces that have prevented the application of regulatory and legal sanctions that have existed for decades, even centuries.”
Whether a financial services reformation can be achieved without another global crisis remains moot, he said.
“I go through waves of optimism and pessimism [about whether change is possible],” Kay said. Right now, he said, the financial status quo has the upper hand.
In an ideal world, though, he said financial institutions would have more direct interactions with consumers, diminishing the need for secondary markets and expensive middlemen.
And while reducing the complexity of finance would help consumers, Kay said financial literacy programs were ultimately futile exercises.
“Most people are not the least bit interested in financial services,” he said. “They just want to deal with someone they can trust.”