Stock exchanges evolved from informal institutions – places where blokes in top-hats swapped cash and promises. Since those early days they’ve acquired some respectability – although they’re still stuffed with barrow boys and upper class spivs – and, in addition to providing the majority of the world economy’s capital for business, they do a lot of statutory donkey work. After the Great Depression it occurred to some bright spark that organised equity markets could act as proxies for governments and their agencies by applying various anti-crash regulations. As a result, and with a few important exceptions, stock markets have been essentially robust and have produced trillions of pounds of value for their host economies and customers alike.
Stock markets are efficient (as efficient as an institution that pays out billions in annual bonuses to its top traders can be) and they’re transparent (relative to the ways privately held businesses go about raising money). Still, they’re unlikely to survive in their current form for much longer.
The only reason they’ve not been replaced by eBay-style networked trading environments is their role in screening out fraud, crappy investments and other unsuitables. I can’t believe it’ll be long before the next generation of capitalist-grade social networks takes on those trust and guarantee roles too. Listing on one of those gold standard exchanges (Frankfurt, London, New York) will be redundant in a decade. This will be good news for companies (cheaper capital) and for investors (cheaper trades) but bad news for traders and exchanges. As before, the middlemen are going to get it in the neck.
This medium- to long-term angst, incidentally, explains NASDAQ’s bid for the LSE (and last week’s announcement from a consortium of investment banks that they’re going to do it themselves). Booming indices make stock markets look like a good bet but the smart money is on whatever comes next.