In search of a quiet courtier to govern the marketplace


Wherever there are markets there are marketplaces. But how this natural monopoly itself is governed varies widely. The management of marketplaces requires the political abilities of the quiet courtier. Private ownership has shown to not always provide these capacities

Wherever 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 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 retains the basic elements of that constitution. As Edward Lloyd’s coffee house developed into an insurance market, the underwriters defined its rules and came to own its property.

A market is a natural monopoly. Buyers and sellers gravitate to the place where most business is 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 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 factors make market services a unique commodity. In the short run, your customer is captive. But if you abuse your dominance you risk losing it. And while all businesses must satisfy their customers, a marketplace must meet the demands of buyers and sellers and often intermediaries as well. The successful 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 conflicting demands from vested interests and only intervention by the Bank of England enabled a scheme to go ahead.

The most successful for-profit marketplace today is eBay. But it has not yet made much money and the issue for its future is whether it can reconcile shareholder expectations with the iron law of natural monopoly – to exploit it is to lose it.

Other marketplaces, such as the London and German stock exchanges, have moved from being membership organisations to companies with quotations on their own exchanges. This 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 form of the public company might resolve the governance issues that continued to plague them.

The row with investors at Deutsche Börse and the enforced resignation of Werner Seifert, its chief executive officer, 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 that profit would supersede politics as the dominant influence on management behaviour. The reality is that politics have become more complex still. So it should be no surprise that resolving the future of Europe’s securities exchanges has fallen to a public agency – to the UK’s Competition Commission, which is 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 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 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 not fit the spirit of the times.


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