STEALING THE MARKET: HOW THE GIANT BROKERAGE FIRMS, WITH HELP FROM THE SEC, STOLE THE STOCK MARKET FROM INVESTORS
By Martin Mayer
BasicBooks -- 208pp -- $23
Wall Street was a relatively sleepy enclave in 1953, when Martin Mayer published his first book about the place. The New York Stock Exchange traded about 1.4 million shares a day, brokerage firms were partnerships, commissions were fixed, and a big shooter was someone who bought a couple of hundred shares. The institutional investor didn't exist, because pension funds didn't buy stock. The Dow Jones industrial average was below 300, still short of the level reached just before the 1929 crash.
Now, after nearly 40 years and more than 20 books--including works on banking, advertising, and real estate--Mayer gives us Stealing the Market. Having considered the innovations of four decades--from block trading and stock-index arbitrage to the emergence of global securities dealers--Mayer somehow can't find much to like about any of them.
Wall Street-bashing is a venerable tradition. But a good bashing book must be persuasive and novel--and Stealing the Market is neither. Mayer's complaints, such as too much short-term trading and too much price volatility, aren't new. Neither are most of his remedies, such as taxing profits that tax-exempt pension funds garner from short-term trading. Mayer's writing is often dense, and the quotes he uses, rather than supporting his case, are sometimes just baffling.
Mayer contends that big institutional investors and brokerage firms--with the complicity of cowering government regulators--have changed the market in ways that disenfranchise individual investors and distort securities pricing. As a result, he says, the markets no longer perform their primary function of helping "decision-makers in the real, nonfinancial economy to determine where the nation's savings should be invested."
That's a thin reed on which to build a book. True, the valuations that investors place on publicly traded companies influence corporate decision-making. But the 24 brokers who formed the NYSE in 1792 didn't set out to advise decision-makers on allocating the new nation's scarce capital. They organized to provide liquidity--to ensure that those who made investments could sell them--and to make a profit by doing so. Without such liquidity, those with capital would be loath to invest it or would demand far greater returns, raising the cost of capital.
Admittedly, Mayer's contention that the market has been "stolen" from investors is alluring. But he fails to demonstrate how our wallets have been lightened. For instance, he notes that institutional investors now trade blocks of stock privately, via an electronic network, rather than on the stock exchange floor. Mayer implies that this harms the individual, but he never explains how.
It is certainly true, as Mayer argues, that the regulatory structure has failed to keep up with the markets' growth. But that's not entirely the regulators' fault; there has been a public policy shift toward deregulation. Moreover, Mayer ignores the justice Wall Street dispenses on its own. Drexel Burnham Lambert finally collapsed when the rest of the Street refused to deal with it. Salomon Brothers has been severely wounded since it was revealed that the firm made bogus bids at U.S. Treasury auctions. Although Mayer treats the big brokerage firms as a monolithic cartel, they are tough rivals and don't hesitate to exploit one another's missteps.
If the market has come "to the edge of tragedy," as Mayer writes, investors don't seem to know or care. They're enjoying the market's bounty. In 1991, for instance, the Dow Jones industrials climbed 24.5%; the average equity mutual fund, 33.1%. Returns from the 1980s, when much of what annoys Mayer took shape, don't qualify as tragic, either. During that decade, the number of individuals who owned stock, directly or through mutual funds, rose 70%, to 51 million. Millions more own stock indirectly, through pension plans.
Indeed, it seems that most people long ago figured out what Mayer writes now: The individual doesn't stand much of a chance competing with Wall Street's behemoths. But most have hit on their own solution: Entrust your money to one of the institutional investors, and let those with training, experience, and resources battle it out.
That may not be Mayer's idea of how the market should work. But bringing back the market of 1953 won't work, either. Like it or not, the big institutions and brokerage firms perform a critical economic function. Last year, corporations sold $48 billion worth of equity capital on Wall Street, raising cash to pay down debt and meet the challenges of the 1990s. It's unlikely they could have done so the old way, selling shares a hundred at a time to mom-and-pop investors. Sure, there's room for reform on Wall Street. But by and large, the system still works.