APPRAISING THE LONDON STOCK MARKET
Introduction and the Tools to Consider in Appraisal
In the lens of economics, stock market is tasked to allocate resources efficiently. Its main purpose is to accumulate the necessary capital for firms to finance future investments which naturally comes from the willing and able investor. Simply, stock market is one of the keepers of the equilibrium between demand and supply (1965). The firm demands and the investor supplies. At the end, when the firm has already harvest the fruits of its project, it will incur earnings that will in turn re-supply the exhausted finances of the investor, usually at a premium. This premium does not make any distortions in the equilibrium but deemed as the payment of the firm for the transaction costs, risk and idleness investor incurred in exchanging his money against a piece of paper.
However, time passed by. The traditional view to stock market needs to be adjusted to the present condition that affects the trading floor. The occurrence of intermediaries like brokers and traders, regulation from the government, involvement of foreign firms and investors, complexity and uncertainty of the environment, are among others that pressure the historic purpose of stock market to mutate into a multi-tasking mechanism that addresses the interests not only of a certain economy but also the individual actors .
For the purpose of our appraisal, actions from these actors that are intended to respond solely towards their self-vested interests and gains at the expense to the requirement of the market will be credited as stock market inefficiency. That is, if they defy fulfilling demand and supply equilibrium even though the stock market allows their transaction to happen and they are suitable for such transaction. Due to this, it can be said that the stock market is inefficient if an investor prefers to supply a large company in favor of a smaller and needier one. However, debate could ensue when the investor affirms that the large company aims to invest to a bigger venture, say, create a research and development facility. In such circumstances, appraisal will require analysis and cost-benefit evaluation to reflect neoclassical economic implications of a certain situation and determine efficiency issues in the stock market. Nevertheless, the assumption in appraisal would be framed in the lens of equilibrium in demand and supply.
In appraising presence or absence of fraud in the stock market, suspicious situations rather than those under litigation or already punished will be emphasized to be able to construct analysis and evaluation. It is assumed that government intervention is acting in good faith as to reprimand perpetuators but fraudulent entities are either just too good or the technological era had helped them. Important experiences of the industry should also be noted. Small companies are the common subjects of the perpetuators ( 1992) because their shares are relatively less traded and relatively small in number. As a result, they are easily controlled by opportunistic behaviors.
Another, brokers and dealers are usually the perpetuators. They are typically experienced and could also have partners-in-crime like accountants, lawyers, advertising agencies, co-brokers and co-dealers. Information about the company, which can be existing or artificial, like financial performance, previous stock market facts and other pertinent data for investors to based their decisions are commonly printed in “pink sheets” (1992) or other media that are limited or sometimes contained misleading content for attraction. Finally, the prevalence of unaccustomed or new investors in the stock market could also be used as indication that motivates fraudulent acts. Of course, the companies who issue the stock can announce exciting plans but bounded by actual operation results ( 1997).
Because of many contributory factors that can simultaneously influence the scope and impact of fraud, our approach to identify possible or noticeable entrance for perpetrators is holistic wherein evaluation to involved actors, situations, regulation and stock market history will be used to arrive at a claim. The appraisal necessitates us to be detectives searching a culprit, who is either convicted or has pending case. However, he is hiding, or in the case of a mere suspect, the detective should prove the facts of the case.
The London Stock Market Overview
The London Stock Market is composed of three different venues wherein investors and companies meet: Main Market, Alternative Investment Market and the Derivatives Market. The first has the most rigorous listing requirements for companies like 25% of shares in public hands, three years trading experience, shareholders approval, presence of sponsors (the consultants) and minimum market capitalization. The second is the soft other of the main market wherein growing and start-up firms could source investments. The last is a platform largely involve in hedging of certain assets to pass or absorb their risks
Both local and international participants are allowed to transact to their chosen trading platforms. Electronic, phone and face-to-face trading are available in the stock exchange. LSE derives revenues from three activities; namely, facilitate access to capital markets, broker services and information systems. All of these are available to guide the decisions of both investors and companies alike on where to invest as well as where to source funds
Operating as a private enterprise ran by a set of Board of Directors, LSE also has investors and also generate its own profit to cover operating costs in maintaining efficiency in trading through internet and television utilization. Thus, performance of companies in the latest stock trading day is delivered to concerned participants faster. Log-in services are also available in their website wherein credit card holders can pay the use of their services. LSE also had opened its first Asia-Pacific Headquarters in Hong Kong to get a peak in the growing economy of China
The LSE Appraisal on Efficiency
The Big Bang’s abolition of fixed commission of brokers and allowing trading companies to have their own dealers in the market ( 1999) could lessen the incentive for them to study the markets. Controlling opportunistic behavior and its accompanying adverse impacts, brokers’ motivation tool, through commissions to perform better to find a company that really needs capital or one that really has surplus of it, diminished. The abolishment could hinder efforts to seek markets in a broader spectrum, as their transaction costs like communication and travel costs cannot be redeemed, that in effect will limit the flow of capital in the stock market. Commission serves as their starting point to get involve in a vast, and now international, market. The option to work in a company as personal broker could also impede their opportunity to drift to a larger and complex market. The limitation of the search is attached to the needs of one company to sell or buy securities, so, transaction tends to be stimulated unidirectional.
The separation of large and small issuers of securities made it easy for the market to distinguish the needy in relative matters. If an inexperienced investor has a surplus or savings in a relatively smaller amount, it can be assumed that he values this amount. To prevent transaction costs like accountant or analyst fees, he can simply invest in AIM as the companies there is easier to evaluate in terms of future prospects. Unlike large companies whose operations are more complex and vast, this type of investor that would invest here would demonstrate huge risks because of ambiguity. The distinction transforms new and inexperienced investors to be efficient capital providers.
The information services of LSE and their media relations department () have the capability to transmit trade data happening in the electronic platforms and trade floors via electronic devices. The advantages of technology in operations of the stock exchange enhance motivation from investors to join the trade due to absence of expensive transaction costs like transportation and time. This is significant to wealthy people who are usually characterized by old age and traveling from a distance can disincentive them to invest. However, this type of investors can be caught to false hopes and loose money because of too much reliance to stock prices undermining the background of the firm they extended their investment. The capital should go to those companies who are capable to use them in a profitable manner. In return, they can bear fruits for their investors. This cycle if uphold can accelerate economic activity.
The business mindedness of Board of Directors could emphasize the importance of profiting rather that of economic equilibrium. Most of them have private enterprise backgrounds (), including the Chairman, which can undermine the government’s role in neutralizing business activities rather limited to profit-driven decisions and strategies. They have marketing arm to allure international investors and capital seekers to get involve in the local trade. In the lens of national interest, there are two implications; namely, capital will flow to finance local businesses and capital will get out of the borders. The oblique intervention of the government in the LSE activities could result to unequal distribution of capital that could adversely affect the local investment seekers.
In the international view, however, the potential of capital to flow in the hands of markets are maximize while transaction cost is minimized. The rich will crawl in the doors of the poor for the latter to benefit from the surplus of the former. The constraint though is that trading firms who are small and needs the capital of larger firms or rich individuals should be listed in AIM. Investors may not be attracted by the category since brokers can easily manipulate the stock price. Assurance should be provided first by the company to investors before transactions may ensue. In the opposite manner, large firms who are listed in the Main Market would receive the greater amount of investment from wealthy investors because of the lower risks of failure of its operations, hence, greater amount of return. Capital could concentrate to this category favoring the stricter policies confronted by companies under this listing compared to AIM.
The LSE Appraisal on the Absence or Presence of Fraud
The available services of LSE create certain nets to prevent existence of fraud in the trading (). They can provide information about the trend, history and other pertinent data for a speculating investor and issuer. It is unlikely that it will risk its corporate reputation and history for just certain amounts of money. Thus, if participants would want to support their decision with safer means, LSE can give it to them. These services also are performed by its employees who undergo training and enjoy benefits. This human resource factor tightens the entrance for fraud to be performed by its brokers, analysts and other sponsors.
Main Market is a market that due to large capitalization of traders (), brokers do not have the tools to manipulate the prices of securities substantially. Because of this, AIM could be a possible and rational place for opportunistic behavior to ensue. The complexity of trading, due to its internationalization, result for markets to trade disregarding analysis or hiring brokers who often regarded as a hope for correct and factual analysis. Since speculation is one of the main mechanisms for investors to trade, studying the nature of the destination of investment is likely to be passed to brokers. The wealthier the investor, the busier it is to observe the bout-by-bout trading. As a result, AIM is an ideal dwelling for ghastly brokers to do their thing, unguarded.
In the Derivative market (), the buyers are gaining through absorption of risks () while the initial sellers of assets get-off from such risks. However, buyers may have enormous risk exposures and may cause its finance to exhaust to a certain level. Because of this, it may re-sell its old contract for a higher price through some form of marketing and “sales talk”. At this point, information about the old contract can be extended manipulatively to involve alluring future gains from the assets. This act is likely to accelerate and becomes more exposed to fraud if the buyer conceives that his original contract phases loss. Since LSE confirms it has a strong market base (), these opportunistic dealers would select victims from the large pool especially international investors.
Though electronic trading is a significant development to modern securities market, the power and speed of technology can also be used in fraudulent means (2001). The information from the internet and chat rooms can mislead investors and can loose money in an instant by using their credit cards to upload the payment. LSE has a website () where important information about the trading is posted. As a result, investors would tend to rely much of their decision making through the internet, perhaps, undermining the information in daily broadsheets due to speed and comprehensiveness of net data. However, scams and misleading information has its ways to be posted and allure investors. The web-based approach and seemingly corroborating stance of LSE to technology, thus, motivate investors to accept data regardless of authenticity.
For the international capital seekers, they can enter the market through AIM with less pressure to show who they really are in home countries (). They can restructure their identities to become good performing and “hot” companies in the eyes of the local investors. They can deploy shares through the control of their brokers wherein collusion to exercise investor fraud could arise. They can distribute laundered money into the market and LSE could also serve as refuge for foreign kingpins who would want to avoid local restrictions to become rich. They can cloth themselves to be small even they are capable to raise huge amount of capital. These companies can list their names the market to start their fraudulent acts towards unwitting investors. The hands-off position of the government to the operations of the business is a huge incentive for fraud to occur.
Concluding Remarks
The inefficiency of capturing a wide capital market base due to unmotivated brokers who are thirsty for commissions and limited concern of personal brokers of trading companies could be addressed by the intervention by the government. Since LSE brokers are also likely to be profit-driven, the state could signal its economic analysts to set-up a team of researcher that can find investors inside and outside its borders. More importantly, it should inform small but enthusiastic firms to issue shares where advertising is the key to dig deep to the grass roots of the business society. In this manner, the effort to invite outside investors will have positive return to the local economy.
Efficiency observed in distinction of Main Markets from AIM can be improved by extending support for the trading firms and prospects under AIM. LSE should protect small firms from fraudulent brokers and inform them to study rumors about stock prices and verify them before trading. LSE could also install authentic information device for investors in AIM in order to prevent unsolicited and misleading data that could hinder the attractiveness of AIM to investors. Further, they could also reverse heavy reliance of some investors, mostly inexperienced, in internet and impersonal information about speculations in the stock market through an effective branding. For example, investors would be provided with a certain tag line such as, “Securities are not cards, trading is not the same as gambling. Authentic information and guided speculation is the key.”
Maybe, it is high time for the state to place a public figure in the LSE Board of Directors. Since it is one of the biggest and most international stock exchange in the country, it is rather logical to oversee its operations as the entire economy is affected by the events in its trading area. This figure will uphold the inflow of investments and transfer of it to small businesses. Perfect competition is the best economic structure developed as it makes every industry alive, produces efficiently and with focus on quality. The capital should not transform the good-looking, large company into a monopoly rather equal distribution of wealth— a public concern.
Being a hotspot, AIM may discourage investors from investing with companies in its listing relative to big names in Main Market. LSE should assess the need to encourage their regular investors to trade in AIM to enhance the well-being of the trade in this area. Incentives to the willing investors from Main Market to trade in AIM could be a rational move. But AIM listed companies should also have a congruent adjustment like requiring them to present company background to get impression from this regular investors. The loose policies in AIM can make or break the trade, companies and investors if not restructured.
The LSE management could improve its reputation to the market through extensive training and behavioral guidance to its employees who often act as brokers and sponsors instilling the virtue of honesty. Although speculation, in practical terms, is a form of gambling, LSE employees can play the game without fraud. When investor understands that the company has integrity, while chance is the only hope concretize by some research and back-up with experience, investments will pour. In the similar manner, AIM trading should be prioritized. Its reputation is the key for small firms to get the capital they need. As an option, the company could demand that every listed company in AIM is required to present the identification of their brokers to prevent fraud and test its integrity.
The fraud prevalent in derivatives market, although often untold, could be minimized when dealers will be replaced by LSE employees. The fight for profit would be a mind game. Practicing complete and accurate information-dissemination to speculators, unnecessary erosion of the economy (from some economics theorists) would be prevented through deployment of the true nature of the original contract of the initial asset sale. Lastly, the idea that LSE sees the internet and the technology as partners for efficient trading should be bounded for the sake of the inexperienced investors. Effectiveness of trade could be undermined that reminding every trader to double check the unsolicited data or ask the LSE to authenticate it could be a rigorous but useful fraud deflection.
Credit:ivythesis.typepad.com
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