What is the Point of (the Hundreds of Thousands of Billions of) Stock Transactions?

Since the financial crisis, several academic studies have highlighted the excessive growth of the financial sector. In this article, we focus on the sharp upward trend in stock trading since the 1980s. Globally, trading in equity markets have now hit over $100,000 billion, equivalent to nearly 150% of GDP, compared with only 5% in 1975. What is the “social utility” of all these trades? Stock market liquidity is undoubtedly a key factor in the cost of capital and, as such, a determinant of economic growth. However, the marginal effect is likely decreasing. Furthermore, many studies suggest that above a certain threshold, trading has a negative effect since: (i) companies benefit from the involvement of long-term investors; (ii) investors tend to perform too many trades; and (iii) it comes at the expense of transparency and erodes the trust vis-à-vis stock markets. A handful of measures have been taken to, if not reduce, then at least limit the growth in stock trading, but these have had only a very limited effect. Only comprehensive reforms of the architecture of stock markets could reverse this trend. Ultimately, these issues take us deeper than trading volume to question the very purpose of stock markets.