Thursday, September 10, 2009

It's not rocket science

Well, then again, maybe it is.

Markets, that is. Given that most of the algorithmic fueling of the markets in the last decade has come from the ranks of physics derivatives, game theory and other realms of the rocket scientists, perhaps it is fitting that it took a couple of physics scientists to come up with the conclusion, which simply tested the hypothesis of the rest of us, that the world's markets are the playthings of a select few.

Study Says World's Stocks Controlled by Select Few and "Companies from US, UK and Australia have the most concentrated financial power."
A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the "backbone" of each country's financial market. These backbones represented the owners of 80 percent of a country's market capital, yet consisted of remarkably few shareholders.

"You start off with these huge national networks that are really big, quite dense," Glattfelder said. “From that you're able to ... unveil the important structure in this original big network. You then realize most of the network isn't at all important."

Large, sparse networks dominated by a few major companies could also be more vulnerable, he said. "In network speak, if those nodes fail, that has a big effect on the network."

The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. Paradoxically; these same countries are considered by economists to have the most widely-held stocks in the world, with ownership of companies tending to be spread out among many investors. But while each American company may link to many owners, Glattfelder and Battiston's analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market.

The results raise questions of where and when a company could choose to exert this influence, but Glattfelder and Battiston are reluctant to speculate.

Guambat reckons Washington repeatedly shows the backbone in bailing out the backbone of the financial markets, but lacks its own backbone to regulate it.

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