The inner workings of Wall Street and financial markets can seem distant and complex for the average consumer going about their daily life. Yet the infrastructure and technology that enables trading stocks, bonds, derivatives and other securities have an enormous impact on main street and everyday economic activities. Understanding these connections can help consumers make better financial decisions and evaluate policy choices that shape market infrastructure.
What is Market Infrastructure?
Market infrastructure refers to the underlying systems that allow financial markets to operate efficiently and securely. This includes the trading venues where securities are bought and sold, the technology for order matching and trade execution, and the clearinghouses that manage settlement of trades.
Key components of financial market infrastructure include:
- Exchanges: Organizations that host a market where multiple buyers and sellers can trade financial instruments. Major stock exchanges include the New York Stock Exchange and Nasdaq.
- Alternative Trading Systems: Electronic platforms that directly match orders usually operated by brokerages. Also called dark pools.
- Clearinghouses: Agents that validate and finalize transactions, act as intermediaries to guarantee trades in case one counterparty defaults.
- Custodians: Financial institutions that hold customers’ securities for safekeeping and manage settlement of transactions.
- Market Data Systems: Technology and vendors that collect and distribute real-time price quotes, trading volumes and other market information.
The smooth functioning of these systems allows capital to be efficiently allocated across the economy and for new economic activities to be funded through securities issuances. However, glitches or loss of trust in market infrastructure can also severely impact business activities and the broader economy.
How Consumers Interact with Market Infrastructure
While retail investors buying a few shares of a major company’s stock interact directly with market infrastructure, the connections run much deeper for nearly all consumers and main street business activities. Here are some key ways market infrastructure impacts everyday economics:
Company Fundraising & Operations: The stock market and bond markets allow companies to sell securities in order to fund investments and operations. Even companies you interact with daily like retailers, restaurants and service providers may use these mechanisms to support their businesses. Disruptions can cut off their access to capital.
Retirement & Brokerage Accounts: The vast majority of retirement accounts like 401(k)s and IRAs invest account holdings in stocks, bonds and funds that transact through financial market infrastructure. Technology glitches and risks with custodians and clearinghouses puts individuals’ lifelong savings at risk.
Consumer Credit & Banking: Many large banks that provide checking accounts, mortgages and credit cards to retail customers also have investment banking arms that interact directly with market infrastructure. Technical errors like the Knight Capital software problem can thus impact the finances of consumers that rely on those banks.
Economic Growth & Employment: Efficient capital allocation through well-functioning markets allows new businesses to get funding and existing companies to expand, driving overall economic growth and job creation economy-wide. Lapses in market infrastructure can cut off investment and severely reduce employment opportunities.
Inflation & Consumer Prices: Market infrastructure plays a key role in determining market interest rates and the availability of credit that impact inflation and consumer prices for goods and services. For example, the types of securities traded on exchanges and investor demand influences rates on business and mortgage loans.
Financial Crises & Recessions: Historically many financial crises and economic recessions have originated or been exacerbated by infrastructure failures and loss of confidence. For example, clearinghouse risks were at the heart of the 2008 financial crisis, resulting in lasting impacts on consumers through job losses, tight credit and reduced economic activity.
Oversight of Market Systems to Benefit Consumers
Given the vast reach into the economy and potential risks, regulation and oversight of market infrastructure is crucial for balancing innovation while protecting consumers. Reform efforts since 2008 have focused on:
- Enhancing system safeguards and testing for clearinghouses and critical technology systems.
- Improving transparency around alternative trading systems and risks of off-exchange transactions.
- Clarifying resolution mechanisms if large infrastructure players like clearing banks fail.
- And coordinating oversight across regulatory bodies and national borders.
While oversight can sometimes be labeled burdensome, ensuring reliable, fair and transparent market infrastructure ultimately benefits all consumers and the real economy. It sustains confidence savings will be protected, companies can access capital efficiently, and the system is resilient to risks that cause wider economic turmoil.
The Future of Financial Market Infrastructure
While financial market infrastructure may seem archaic to those outside the industry, there are continuous innovation efforts focused on driving efficiency, improving access and enhancing system resilience.
One major area of focus is migration to cloud-based technologies and blockchain-enabled platforms. Cloud computing allows key market systems to scale flexibly to suit trading volumes. Blockchain offers potential improvements in transparency, security and operational costs.
Additionally, open access initiatives seek to improve inclusion for investors and companies interacting with market infrastructure. This includes lowering barriers to retail investor participation, as well as expanding opportunities for private small and medium enterprises to access growth capital through public listings.
Finally, after the turbulence of the 2008 financial crisis, regulators continue working to ensure market infrastructure and systemically important institutions have improved risk management and cushions to absorb market shocks.
While the landscape continues evolving, the connective tissue linking Wall Street finance to Main Street business and consumer economic activity persists. Keeping a pulse on market infrastructure policy and remaining vocal on reforms that best promote stability and transparency serves both individual and wider economic interests.
Final Words
Paying attention to how market infrastructure policy decisions play out and reform efforts evolve can be abstract compared to making monthly budgets or reading company earnings reports. Yet it remains deeply connected to availability of jobs, the interest rates on loans, retirement account returns and even prices at the grocery story. While Wall Street and Main Street may seem worlds apart, the infrastructure that connects financial dealmaking impacts the economic reality of everyday consumers.
