New Delhi: Chris Gibson-Smith , chairman of the London Stock Exchange (LSE), is in India at an interesting juncture. The capital market architecture in developed markets is in the midst of far-reaching change and no one has a clear idea of what shape it will eventually take. Gibson-Smith spoke to Mint about the current changes. Excerpts:
Your visit is a part of the follow-up to Prime Minister David Cameron’s recent visit. From the standpoint of the capital market, what is your visit’s goal and what would you consider as a measure of success?
I am doing three things. I am familiarizing myself with the big issues in India by talking to leading businessmen and politicians. We are giving them our message about London’s role in the global economy. We are talking to private companies about the opportunities of raising capital in London.
Essar Energy Ltd made a large capital offering ($ 1.9 billion) at LSE this year. But how has the response from Indian companies for AIM listing (alternative investment market for small companies)?
AIM is virtually the only successful small companies capital market in the world. So, entrepreneurial people are intrinsically interested in that and AIM has a history of working for Indian companies.
And the main market?
We have had some good listings this year.What is interesting is the way we positioned Essar in the whole global economy. All big investment banks are now writing about Essar in completely new ways.You can see the company has really understood its role here. Its profile has changed.
Would the change in the perspective of potential investors be the most attractive proposition you offer to issuers?
There are good reasons for staying at home; there are good reasons for going international.If you are a large company expanding and you have global ambitions, then options of raising capital and having different capital pools distributes your risk. It is not easy to reach the standards required to list on the London Stock Exchange.It is our role to make sure only first class companies list.
You have developed a formal relationship with the National Stock Exchange. Could you give us an idea of where it stands now?
We are looking at two things, which is developing cross-border products and we are looking at helping support development of a small company, mid-cap company market.
This is something we did Japan, for instance. Normally, it also requires new laws and new regulations to create the right environment. It takes a while.
We have had a go at creating this market earlier and it hasn’t been successful. Could you give us an idea of what it requires?
It is a mixture of both development of capability and companies. What we call the nomad system, where an adviser helps the company achieve the standards that are necessary. It requires a lot of education, lot of new practice. So, a company has to be really committed to want to do it. It is not simple.
Moving away from India, we wanted your views on stock exchanges. It’s been a turbulent time since 2007…
It’s been turbulent since 2001.
Particularly since the advent of multilateral trading facilities (MTFs are cross-border, high-speed, low-cost alternative trading venues). If you were to take a 10-year view, how do you see stock markets evolving?
Lets start with (what is) specific to Europe. MTFs are all owned by banks and yet banks are our prime clients. We find ourselves in competition with our prime clients. What the competition has done is driven down tariff structures and increased speed. The increase of speed was the unintended consequence of the regulation change. (In 2007, pan-European regulation opened the market to competition.) What we are doing is competing fully. We expect to emerge from this as a formidable competitor.
We are being successful in our response to competition and we are now faster than our main competition. What has happened is unintended consequences from regulators. The markets are now more fragmented, less transparent and more difficult to trade upon. The liquidity is not as easy to find in many instances. The regulators didn’t intend any of this.
Secondly, the crisis has induced a whole wave of pressure for everything to trade on markets. So, the global regulators would like to see as much trade on markets as possible. That hasn’t worked out yet either. That is pushing everything back to the exchanges.
So, we don’t know what this will look like in 10 years’ time. It is very dynamic.
There are instances of regulators expressing anxiety over dark pools (electronic venues that handle large transactions anonymously so as not to tip off traders in the open market). Will the push back mean the responsibilities of stock exchanges will increase manifold?
These are national institutions which play a fundamental infrastructure role. The regulator is always looking over your shoulder. At the same time, we have got to satisfy the wealth urge of our owners. One is constantly looking to balance those two things.
At the moment, nobody knows where it will end up. I mean dark pools are again an unintended consequence of regulatory change. We regard regulators as the greatest risk to business we face. We don’t regard the competition or MTF as the greatest risk we face.
Dark pools exist because fragmentation of trading reduced the trading parcel size to such a small level that you can’t trade large volumes of stock any more without moving the price. That happened because of regulatory change and unintended consequence. Dark pools is an attempt to allow institutions to trade large parcels of stocks. But in the process you lose transparency.
So, we have gone from a simple world of natural monopolies of a single exchange to a complex world of this is an exchange, that is an exchange (points to one corner), that is an exchange (points to another corner). Now, you have different regulatory standards, different technology capabilities and different intentions. And the regulators are still thinking about it.
You have invested in a software company. Is LSE preparing for a world where location is completely irrelevant? It could just be an extension of dark pools and MTFs for big trades?
It looked as though location was going to become irrelevant. Instead, what has happened is the exact opposite. Location is highly relevant. The reason for that is speed of trading is so fast that the speed of light is an impediment to trading. So, if you set your trading engine next to my trading engine, there is no speed lost. So location now means everything.
Now the balance to that is the new engines are incredibly cheap. So it is quite easy to put them all over the place. And again, no one foresaw all that.
It is counter-intuitive.
Every step has been counter-intuitive. Every step was not foreseen. And it is still unfolding.
During your term at LSE, you have seen the ownership pattern change. The majority of the owners are not just from outside the UK, they are from outside Europe. How does that influence developments?
It is all part of the evolution. Eventually, I expect us to be presenting a pan-global trading capability in stock. Though we are not yet clear what the speed or location issue means for that idea. We still have to align regulatory systems; it is very difficult to trade stock in two different regulatory systems. We have to align legal systems.
We expect to resolve all of that and eventually there will be a series of global trading systems. But again, nobody yet knows quite how that is going to work.
In this scenario, will we have a series of regulatory systems competing with each other, and some loosening standards to attract business?
Regulators are very aware of regulatory arbitrage just as they are in the banking system. They are very anxious to avoid setting up regulatory arbitrage. So you see regulators now talking to each other.
It is a very interesting world. Forty years in business—30 years in the oil and gas business—I have privatized the air traffic systems in the UK.
In my life I have never seen change of this complexity and this speed without exception.
That must make you very sympathetic to regulators.
A large part of my job has been the consequences of their unintended consequences.