John Kay: In search of a quiet courtier

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Wherever and whenever there are markets there are marketplaces. Mostly they have been controlled by public authorities, as in ancient Greece and Rome. Today, the largest produce market in the world, at Rungis near Paris, is managed and regulated by a consortium of the French state, the province and the city. Even in capitalist New York the Fulton fish market is ultimately responsible to the federal Department of Commerce.

Many markets were established as membership organisations. The Chicago Board of Trade was created by local merchants and still retains the basic elements of that constitution. As Edward Lloyd’s coffee house developed into an insurance market, the underwriters themselves defined its rules and came to own its property.

A market is a natural monopoly. Buyers and sellers naturally gravitate to the place where most business is being done. And although the services of the market organisation are indispensable, their cost represents only a small fraction of the value of the trade that they facilitate. These features of a marketplace resemble other public utilities such as water supply, electricity distribution or roads. But it is easier to establish a new marketplace than a new electricity grid. The business of market organisation, unlike other utilities, is contestable.

These is combination of factors make market services a unique commodity. In the short run, your customer is captive. But if you abuse your dominance t position, through high prices or inefficiency, even slightly, you risk losing it. And while all businesses must satisfy their customers, a marketplace must meet the demands of buyers and sellers and often those of intermediaries as well. The successful governance and management of markets requires unusual skills.

Markets organised on principles of mutuality have experienced strains, and this constitutional form is under pressure. The New York Stock Exchange lost ground by attempting to maintain listing standards (good) and defending the position of technologically redundant specialists (bad). Its London counterpart managed the transition to the electronic world even more ineptly. The Taurus settlements project collapsed amid in the face of conflicting demands from too many vested interests and only intervention by the Bank of England enabled a scheme to go ahead. At Lloyd’s, a group of insiders successfully enriched themselves while external members lost heavily.

The most successful for-profit marketplace today is eBay. But it that company has not yet made much money and the decisive issue for its future is whether it can reconcile the shareholder expectations in its current stock price with the iron law of natural monopoly – to exploit it is to lose it. , through entry or through regulation.

Other marketplaces, such as the London and German stock exchanges, have moved from being membership organisations to become companies with quotations on their own exchanges. This change of status is partly motivated by the bad reasons that have put all forms of mutuality under pressure – opportunities to realise goodwill for the benefit of today’s members and to generate flotation fees for advising banks. But the better argument was that the familiar form of the public company might resolve the governance issues that which continued to plague them.

The recent row with investors at Deutsche Börse and the enforced resignation of Werner Seifert, its chief executive officer, illustrates that shows such hopes are illusory. The effect has only been to add two new vested interests – managers with expansionist ambitions and external investors – to an already crowded meeting table. It was hoped The hope was that profit would supersede take over from politics as the dominant influence on management behaviour. The reality is that politics have become more complex still. And So it should be no surprise that resolving the future of Europe’s securities exchanges has fallen to a public agency – curiouslyto the UK’s Competition Commission, which is currently deliberating on bids for the London Stock Exchange.

There is no simple or universal answer to the question: “how should markets be governed?” State ownership, which allows all interests a say but is not beholden to any one of them, mostly seems to operate well.

The management of marketplaces requires , above all other skills, the political abilities of the quiet courtier. The public failures of Richard Grasso, the former NYSE chairman and CEO, and Mr Seifert, illustrate how notably they lacked these capacities. The corresponding success of the fonctionnaires who manage Rungis is demonstrated by the fact that no one knows who they are. But to propose that stock exchanges be nationalised does is not a plan fit the spirit of the times.

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