Not for the first time, the end of exchanges is being predicted. Not for the first time, exchanges are about to prove the critics wrong. And they will do so because of the unique mix of attributes that they embody: innovation, scalability and resilience, all combined with the hugely powerful and valuable network effect that is perhaps their most distinctive characteristic. This is what makes them more credible than other forms of financial market, which instils public confidence in exchanges themselves but also in all financial markets. Public policy choices should adapt to reflect this.
But first, let’s look at the bigger picture. Why do we care about how financial markets in general work in the first place? Starting from this point is useful, because it forces us to go back to first principles. That means we end up with the right market architecture: an outcome that is not a given and which requires constant attention.
That market architecture must not only be sound but serve a clearly identified purpose. At a very basic level, without financial markets, we are back in the dark ages of barter and middlemen. With them, we can embrace advancement – both social and industrial. Markets can make an economy not just bigger but more adaptable and flexible. It becomes possible to fund not just growth but also transitions, not to mention risk management.
So far, so good. But then why do we care about the details of how it is done? And why not embrace new, alternative, and perhaps ‘disruptive’ approaches?