Equity markets are too focused around the activity of trading, to the detriment of investors, according to professor John Kay, who has been mandated by the UK government to improve the country’s financial sector’s long-term health.
Kay said market participants, including asset managers, brokers and other trading partners, had assumed the central role in equity markets, and taken the power and influence away from the end investor and companies coming to market.
“There is too much trading and not enough investing – we are looking at what can be done to remedy that,” he said.
Kay was addressing a seminar hosted by the UK Sustainable Investment Forum last night. Kay and his team have been receiving comments from market participants about how investing for the long-term in the UK could be improved. Final recommendations will be submitted to the government’s Department for Business, Innovation and Skills in July.
The department is also currently reviewing high frequency trading through the commission of a report by the Foresight Project.
“We need more emphasis on investors and less on traders,” Kay said, asserting markets should not revolve around price discovery and movements. He said prices should be based on the stage a company had reached in terms of its development, maturity and strength, rather than market sentiment.
“We need a more simple financial system with a more direct relationship between savers and companies. Maybe asset managers could compete with each other about the effectiveness in performing that role,” Kay said.
He added the asset management model could be more effective if it measured success by the improvement in the performance of companies in which its clients invested, rather than the generation of alpha.
Responding to a question about the thirst for change within the financial sector, Kay said financial regulation had not helped by focusing on process rather than outcomes. He said unlike the financial sector which had regulation formulated by lawyers, other sectors – including utilities – had regulation formulated by economists and had been more effective.
Kay believed that improving the UK financial sector required fundamental change and could spell the end of the line for trading as we currently know it.
Reporting by Elizabeth Pfeuti, European editor, aiCIO, an Asset International publication