Third and last part of Chris Cook’s propositions for a new market structure:
We have seen how two distinct consortia comprise Market 3.0. How is it possible to link them together into a seamless enterprise with a viable business model?
Virtually all markets were until relatively recently run by cartels of intermediaries (i.e. exchanges) in their own interests. They were typically constituted as not for profit or mutual entities which would return any surplus of income over expenditure to members.
The recent trend among exchanges in response to the threat posed by ATSs has been demutualisation into for profit entities; the reasons being:
* the requirement for capital to fund development of the exchange’s own dealing systems and networks;
* more flexible management, free of the factionalism that plagues exchanges;
* the prospect for executives and shareholders alike of mouthwatering returns on their investment from exploitation of a dominant position.
A moment’s reflection on the latter leads to the conclusion that the ‘shareholder value’ thereby generated has to be at someone’s expense, i.e. the constituency of customers, now including the ex-members. In other words, the flaw (which is a fundamental flaw of capitalism itself, excused by the fact that alternatives have to date proven to be worse) lies in the divergence of interest between the providers of this capital and the users. At this point, an innovation is proposed which may square the circle. The ‘open corporate’ entity suggested is not rooted in the UK body of Companies Act legislation, but rather in the unintended potential of a recent innovation in UK Partnership Law. It has been possible in the UK since 1907 for a partner to introduce capital and limit his liability but at the price of being unable to participate in management. The key UK legislation in the creation of the open corporate was the Limited Liability Partnerships Act 2000 which came into effect on April 6, 2001. This Act effectively enables partnerships, typically of professional firms such as accountants and lawyers, to protect the assets of the individual partners in the event of insolvency — itself increasingly likely in the face of massive claims of compensation. It reflects similar US Limited Liability Partnerships (LLPs).
A UK LLP is a corporate body with members/partners who may be individual or corporate (or a mix of the two). It is governed by a member agreement which sets out the rights and obligations of the members inter se. However, it is doubtful that the use to which it may now be put was ever conceived when the Act was drafted.
A Market Corporation will be a UK (or possibly for tax reasons Jersey) LLP.
Members of Market Corporation LLP will own proportional shares in the value of the enterprise rather than the shares in a for profit joint stock company, which are created and issued with a nominal value –typically GBP1.00.
Such proportional shares are infinitely divisible: a partner with a half share therefore has 500 thousandths or 500,000 millionths and so on, and the value of such a share may be determined at any time as a proportion of the value of the enterprise. The member agreement of Market Corporation LLP will allow such proportional shares to be freely tradeable between members or constituencies of members. New members will be invited to contribute capital or services in return for shares. Most revolutionary of all, it will be possible to raise additional capital without relinquishing control by lending or pledging shares.
This will be accomplished through the use of the ‘repo’ agreement — the sale and repurchase of shares. Repos — which are relatively little known for a multi-trillion pound industry — allow institutional investors to generate an income by lending shares to each other for a period of time. The Repo price would reflect a benchmark cost of money plus a risk premium. A default gives rise to a very simple outcome, which is that the financier would automatically acquire full ownership of the shares. The outcome is that the utility cash-flow received by the Market Corporation from its ITA members and remitted to its MSP members may thereby be simply and effectively securitised. In an open corporation, debt is equity traded forward.