Street Name System: Market Transparency Killer
This article was first published at Tabbforum.com:
A generation ago, two software platforms fought for domination of the US market.
One was elegant; a game-changer. It distributed power outward to the little guys, transparently giving them tools they had never before enjoyed. Users understood immediately how the technology could change the world for the better.
The other was clunky and harder to access. It often left users frustrated. A puzzling maze of rules and commands governed how it functioned. But it had an important advantage: It meshed with the underlying machinery of the incumbents in the market.
The results of that battle still echo down to us today. Perhaps the business world would have been much better off if the more elegant platform had won from the beginning.
Apple versus Microsoft? No, this was much more important than that battle.
We are talking about the tragic decision that gave us today’s centrally controlled and unwieldy Wall Street Operating System – commonly called The Street Name System (SNS).
The SNS helps settle all securities trades, every day. It also keeps investors in the dark. It stops them and the companies they invest in from communicating directly. Instead, they must navigate six or seven layers of clerks pushing paper at the banks and brokers that stand in the middle of it all. The SNS is what kills market transparency in the market. It was probably a big contributor to the 2008 crash. And it still is not fixed.
Why did the SNS prevail? Because it helped big financial incumbents stave off competition. And investors today are still paying the price.
The system that lost out to the SNS in the 1970s was modeled on the new, innovative electronic marketplace called the NASDAQ. NASDAQ at the time was just starting to take market share from the NYSE and New York firms. If the alternative to SNS had been adopted, then a nationwide distributed system for delivering shareholder communications would have been implemented. It would have directly linked issuers to investors around the country, years ahead of the Internet as we know it today.
Imagine what might have been if market transparency had prevailed. What could have developed out of such a solid framework? Corporate governance and investor feedback would have been much more robust than it is today. The voice of investor groups would have directly impacted management, un-muffled by layers of bureaucracy. None of the arcane rules for soliciting and delivering votes would have been necessary. Corporations, in turn, would have had much higher quality feedback from their investor bases, leading to more efficient funding and overall lower costs of capital.
The distributed system itself might have been a platform for encouraging innovation. Investor-issuer interfaces could have developed, just as Facebook emerged on top of the basic browser. Investor-to-investor channels also would have been possible much earlier, especially to help in illiquid markets. The more sensitive communication linkages might have triggered warning signals earlier to head off the global financial crisis. And better market transparency could have expedited the recovery.
These benefits (avoiding the dead-weight losses and excess rents of middlemen) would have dropped to the bottom line of the economy. The chance was missed.
It’s not too late. Centralization won the first round. But just as Apple eventually caught Microsoft, we are now seeing online efforts nibble away at the SNS. Perhaps investors and issuers eventually will be able to find ways around the most costly information blockade that still exists in the Google era.
