4 key takeaways from Fulbright University Vietnam’s open discussion with Philadelphia Stock Exchange reformer, NASDAQ vice chairman Meyer “Sandy” Frucher.
Mr. Frucher has been front and center in the creation and revitalization of ethical capital markets. In 1998, he became the CEO and Chairman of the Philadelphia Stock Exchange. Previously beset with financial difficulties, Sandy Frucher modernized the exchange and increased revenue growth by 64% and options value growth by 155%. In 2007, the exchange was acquired by NASDAQ for over $690 million where he then became Vice Chairman.
Technology and transparency: The case of the Philadelphia stock exchange
In the not too distant past, stock exchanges were organized very traditionally: a physical “floor” around which traders gathered in person, and a “specialist” centralizing information on offers and prices. The score keeper was the single repository of knowledge, an arrangement very vulnerable to insider trading, which is bad for business, as it puts the interests of the insider above those to whom he or she owes a fiduciary duty, and can artificially influence the value of a company’s stocks.
When Meyer “Sandy” Frucher took the helm of the Philadelphia stock exchange (PHLX), the oldest stock exchange in the United States was a very complicated affair, rife with open interests. “There is a tight correlation between gaps in information access, lack of transparency, and stock exchange corruption. At the time, the PHLX had made no technological advances, so that’s how we approached the problem.” Under his leadership, the PHLX established a “trail” of transparent and trackable transaction data, driven by computer technology.
“As we moved forward with financial technology, we gained increasingly more ways of monitoring behavior patterns consistent with legitimate trading. We were met with resistance from interests at the PHLX, which meant we were succeeding. Today, we are equipped with sophisticated techniques to ensure the fairness of the system.”
Current-day NASDAQ continuously develops cutting edge tools to ensure the data is safe, trades execute easily, and the ingenuity of dishonest actors is kept in check. This provides added layers of security and transparency, the foundation of a successful – and ethical – capital market.
“For me, financial markets are the place where the lowest person on the economic ladder can invest in stock and accumulate wealth. Some buy stocks for their pensions, to get their children through college, or even make fortunes. This only works if individuals have a fair access to reliable information.”
While the advent of data-driven transactions opened up stock exchanges to a larger public, it also made automation possible, raising concerns among many involved parties. Attention is particularly focused on high frequency trading and its potential impacts on individual stockholders, which Mr. Frucher also discussed.
Individual investors, high frequency trading: different levels, different markets.
Motivation to invest in global markets is highly differentiated, but two broader trends of behaviors emerge. On the one side, individuals look for profitability with their savings, and invest in a single or a portfolio of companies, at various scales of financial capability. On the other, institutions that can employ high frequency trading algorithms care little how a specific company fares, but rather how it trades. The latter’s goal is to make massive numbers of transactions as quickly as possible, gaining percentages of pennies at scale through computer algorithm, a behavior often seen as controversial. But for Meyer Sandy Frucher, those represent completely different levels of operation and markets.
“Some worry it changes the direction of the market, but it only impacts a fraction of it at a moment in time, spread over myriad asset. In a sense, high speed trading is a shooting match between rich folks who can afford the technology, gaming each other.”
Mr. Frucher’s opinion is that high frequency trading is a logical continuation of the data-driven tools designed to maintain transparency and fairness, and that technology should be embraced to become an engine for positive outcomes. “Markets can be too enthusiastic, but individual investors still stand to benefit from the dynamism and continuous capital injection accompanying massive computer driven trade.”
The future of financial markets: Towards ethical transparency?
Since the 1990s, financial markets have made huge strides in transparency, accountability, and governance. For Meyer Sandy Frucher, increasing transparency beyond the bottomline is a strong possibility for the future of markets. Mr. Frucher cited The World Federation of Stock Exchanges’ (WFSE) recent efforts. WFSE is an international trade group representing more than 200 trading venues listing a total of more than 45,000 companies, the combined value of which was $82.5 trillion as of 2017. WFSE promotes widespread access to financial markets and the safety and soundness of the global financial system.
The WFSE is working to create indicators for environmental and ethical outcomes, such as carbon emissions, or humane labor conditions for resource extraction, and even diversity and inclusiveness, helping investors make decisions in line with their personal values.
“This shows capital markets are evolving to reflect the ethos of the larger society. In order to get buyers and sellers, you need information about ‘value.’ Now those data points are all out there for the public to see and make informed decisions, helping us fund public works, build schools, drive consumer technology, and fulfill the hopes of investors and entrepreneurs at every level. Market survey, monitoring, and compliance are the focus and pride of NASDAQ, and I am convinced that better data is a crucial contributor for good in society.”
Q&A: What do you see for the future of Vietnam?
“In my limited glimpse of Vietnamese society, I have seen incredible positive change. Nowhere else have I seen a public policy school emerged into a liberal college so quickly. Young people care a lot about the environment, and you have now a university nurturing leaders and makers, equipped with the analytical and problem-solving skills necessary to thrive in our changing world, which is admirable.
“With the incredible upward mobility I’ve witnessed, as well as the giant strides of progress in capital markets, there is tremendous opportunity in accompanying the next generation by teaching financial literacy in the earliest point in the education system. Vietnam, as a promising emerging economy, will always need more informed investors and capable business leaders, driving society forward.”