Who controls the stock market, or, physicists do it differently | FT Alphaville

Who controls the stock market, or, physicists do it differently

Imagine a group of physicists looked into the global financial industry. What remarkable things could they find?

Covariance strategies? New risk management models? The origin and prevention of asset price bubbles?

Or, how about, who controls the global stock market? Perhaps illustrated with some nodal charts that look like this:

The backbone of complex networks of corporations - nodes

Josh Reviews Everything points us to this paper, titled “The backbone of complex networks and corporations: Who is controlling them?” on the physics arXiv blog. And the premise, along with those nodal charts, looks promising. Physics arXiv summarises:

The study of complex networks has given us some remarkable insights into the nature of systems as diverse as forest fires, the internet and earthquakes. This kind of work is even beginning to give econophysicists a glimmer of much-needed insight in the nature of our economy. In a major study, econophysicists have today identified the most powerful companies in the world based on their ability to control stock markets around the globe. it makes uncomfortable reading. …

Now James Glattfelder and Stefano Battiston at the Swiss Federal Institute of Technology in Zurich have included these factors in a study of the control and ownership of stockmarkets in 48 countries around the world…

Anyway, using physics methodology the authors have found the “backbones” of the global economy — the 10 most powerful companies in the global financial industry, as measured by stock ownership. And they are:

1. The Capital Group Companies
2. Fidelity Management & Research
3. Barclays PLC
4. Franklin Resources
5. AXA
6. JPMorgan Chase & Co
7. Dimensional Fund Advisors
8. Merrill Lynch & Co
9. Wellington Management Company
10. UBS 

As Josh Reviews Everything points out — these are a bunch of enormous fund managers and massive market-maker banks. Not really surprising, then. In fact, Josh goes so far as to title his post “OBVIOUS tag, where are you?” exclaiming: “OMG. They’ve just discovered that funds managers and market-maker banks own a lot of shares! What a scandal!”

However, there is some interesting stuff in the report.

For instance, this graph below, which (we think) plots the dispersion of control for various countries.  The X-axis is a measure for the local dispersion of control and the Y-axis indicates global concentration of control.  The paper notes:

Figure 11

In Fig.11 the log-values of ‘s’ and ‘h’ are plotted against each other. The ‘s’ coordinates of the countries are as expected: to the right we see the presence of widely held firms (i.e. the local dispersion of control) for the Anglo-Saxon countries, AU, GB and the US. FR, IT, JP are located to the left, reflecting more concentrated local control.

However, what is astonishing is that there is a counterintuitive trend to be observed in the data: the more local control is dispersed, the higher the global concentration of control becomes. In essence what looks like a democratic distribution of control from close up, by taking a step back, actually turns out to warp into highly concentrated control in the hands of very few shareholders.

And from the conclusion (our emphasis):

It has been known for over 75 years that the Anglo-Saxon countries have the highest occurrence of widely held firms. This statement, that the control of corporations is dispersed amongst many shareholders, invokes the intuition that there exists a multitude of owners that only hold a small amount of shares in a few companies. However, in contrast to such intuition, our main finding is that a local dispersion of control is associated with a global concentration of control and value. This means that only a small elite of shareholders continually reappears as the controlling entity of all the stocks, without ever having been previously detected or reported on. On the other hand, in countries with local concentration of control (mostly observed in European states), the shareholders tend to only exert control over a single corporation, resulting in the dispersion of global control and value.

Finally we also observe that the US financial sector holds the seat of power at an international level. It will remain to be seen, if the continued unfolding of the current financial crisis will tip this balance of power, as the US financial land-scape faces a fundamental transformation in its wake.

Actually, no, scratch that, we too are filing this under the obvious category.

Related links:
The backbone of complex networks of corporations: Who is controlling them? – research paper
OBVIOUS tag, where are you? – Josh Reviews Everything
Merrill: Unwinding the West – FT Alphaville
NuclearPhynance – Phynance forum