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06:02 pm: A stock market that serves the economy

I would like to present a small proposal to get the world economy back on track.

First, history: Some companies choose to “publicly” trade shares of themselves. The chief benefit to a fledgeling company in going public is that it enables the company to raise capital from a very broad pool of investors. This is frequently the time that the original owners cash in on years of hard work. The original owners and investors sell off some fraction of their company to “the market,” and take the money. In many cases a company will have been structured such that it “owns itself.” Thus, when the company sells a portion of itself to the market at large – it can “capitalize,” shorthand for generating a large amount of cash all at once.

There is a downstream advantage, both to the company and to the economy as a whole that when companies are publicly traded, we can get accurate assessments of the value of – not just the corporations themselves – but also of whole segments of the economy.

Finally, the existence of such markets enables the ordinary citizen to diversify his investments in a straightforward way. A lot of the social benefit of banks comes in stability over the very long term – decades. Rather than investing just in my neighbor’s business – I can pay a broker to spread my retirement account across the whole economy. The goal there is not any sort of get rich quick scheme – but rather to prevent a single disaster from rendering me penniless after decades of work.

The government (by which I mean “the citizenry,” by which I mean “me”) has a variety of interests in regulating the markets on which corporations are traded. We want to prevent fraud. We want to ensure that the market is not biased. Finally, we have an interest in regulating all aspects of corporate behavior. Corporations are powerful constructs in society, longer lived and richer by far than individuals – and beyond ethics or morals by design. They bear watching.

So here’s the proposal. It’s a few simple and straightforward ideas:

* If a market manages sales of shares of publicly traded corporations, then all transactions in that market must involve the purchase or sale of actual shares of actual companies. Gambling in derivatives, future prices, horse races, coin tosses, whether or not it will rain, and so on shall be barred from these public stock markets. Note that such transactions would still be absolutely legal. I just want to separate the institutions that exist to capitalize and assign value to corporations from the ones that exist for gamblers to make a quick buck off the system.

This purifies the stock market to some extent and gets it back to its roots.

* All offers for sale or purchase must be submitted to the market with a lower and higher bound on the asking / offering price, and a specific number of shares.

A large part of the goal here is to prevent accidental destruction of a real corporation that employs real people and produces real goods. Last week’s stock market “oopsie,” might have bankrupted successful and profitable companies.

* All transactions for a particular day, in a particular market, will be settled at the close of the business day. The algorithm for setting an order in which they will be settled shall be public, though it may differ from market to market.

Yes, that’s “one settlement per day.” This ought to lend a more contemplative, research driven bent to the investment world.

Of course, gamblers will still be able to gamble as fast as their hot little hands can twitch … they just can’t do it with the actual shares of actual corporations that employ actual people. I don’t want jobs or retirement accounts on the line when gamblers freak out.

And yes, day traders, you’re just gamblers. You contribute no value to society through your actions – and you’re looking to make a quick buck off the suckers. I don’t mind that you do your thing – but I would rather that you screw each other rather than me.

Originally published at chris.dwan.org. You can comment here or there.



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