Introduction
It gives me great pleasure to be here today. This is my first speaking opportunity since I became chairman of the London Stock Exchange in July and I would like to thank Mark and Angela for inviting me to speak to you, as one of the Exchange's key customer groups.
My title is "the roadmap ahead". This road is one we will be travelling together. The road we choose will be of some importance, not just to ourselves, but also to the country's economy, since APCIMS members, including the London Stock Exchange, are significant contributors to Britain’s most successful industry. Financial services contributed £13bn to the UK current account last year and latest figures suggest the industry accounts for over 5% of domestic GDP.
I want to begin by talking about the values that underpin our business.
Over my years in business I have learned that values should create the foundation for your direction and actions. They should be reflected in all that we do and guide how we approach our future – so you will find us focussed on our customers and clients, and competition and the standards of our products and services.
The Exchange's values are liberal values – I mean that in an economic sense – since equity markets are perhaps one of the supreme manifestations of a liberal economy. But for most of our history, while we may have run efficient markets, we haven’t been subject to the disciplines of the market ourselves.
All that has changed and I believe we are moving a long way from being the 'Pillar of the City' of yesteryear. Although, if you want to be reminded of how it used to be – just look across the Atlantic!
As a listed plc operating in London, the most competitive equities trading market in the world - and we compete pretty hard to get 62% of the order flow on SETS - we welcome the disciplines of the market and the pressures of competition.
At the LSE we aim to be at the forefront of moves to create a more competitive – and by that I mean a more efficient – equity market, to offer more trading opportunities to our customers and to enable you to benefit from a more liberal industry sector. Competition is the best, often the only, way to improve the quality of the market. We are working hard to ensure that we offer the most attractive terms to trade equities in London, others will have to work harder – and I mean harder – to beat us. And that will be to your benefit.
Competition is also the route we will follow to grow our business. That is why we want to see greater competition in Europe’s capital markets. Given London's competitive position...
- 8% of the share of the global equity market, compared with 3% in Frankfurt
- The highest market capitalisation in relation to GDP of any European country
- 48% of global trading in overseas listed equities
...we have a sound starting position provided the playing field is truly level and open.
So we are committed to growth; but we will only grow successfully if we take you, our customers, with us. Which is why placing customers to the fore is central to our values. We will do this through an open, fair and transparent business model, through listening to your needs, and through developing products that support you.
Taking you with us is critical to our success.
Liberalisation
I have mentioned the importance of a liberal economy. Europe has been striving to implement its great economic liberalisation programme which it kick-started three years ago at the Lisbon summit. Europe's public aim is to have the most competitive and dynamic knowledge-based economy in the world by 2010. In the context of our industry, the key measure to achieve this is the Financial Services Action Plan, or F-SAP – a dominant theme of the conference today. F-SAP is designed to bring about the gradual removal of sufficient regulatory barriers to create a single market in financial services.
Putting aside the question of whether it's really possible to regulate your way to a free market, we are, I think, all broadly supportive of the European Union’s objective. We all want to see a single market with the scope for efficient providers to win more cross-border business. But I agree with APCIMS own recent report on the FSAP that the success of the project is not just about getting the directives agreed. Instead more attention needs to be given to the quality of implementation and enforcement of the FSAP directives.
This doesn't mean of course that we have been content to wait and see how the FSAP directives turn out in hope that that these will combine to complete the single European market for financial services. On the contrary, we have been fully engaged in the early stages of the legislative process and have been actively campaigning on issues of importance to the London market. We have found that our interests have often been aligned with those of the private client broking and investment community.
- Specifically, we want an end to concentration rules that force business onto central markets, opening up choice to customers and making execution venues compete for order flow;
- we want more effective passporting arrangements for investment firms and markets to facilitate real competition across borders; and
- above all, we need to make sure that investor protection is not used as an excuse to over-regulate, for example by making “execution only” business unviable. Thanks to APCIMS, the European Parliament were persuaded to support “execution only” in the ISD. Unfortunately, the Council text is less good and we must all keep up the pressure for a better final outcome.
Impact of competition
The flip side to creating a more competitive landscape is that we must accept that competitive pressure will also be brought to bear on the London market. That's pressure on market operators like the London Stock Exchange and on its customers – including of course the private client broking and investment management community who we know have been feeling the squeeze of a bear market. Fortunately, it also offers opportunities to win new business and, in the EU at least, to render national boundaries increasingly irrelevant in the marketing and execution of financial services.
Within the grasp of Europe's policy makers is a great goal. Huge advantages flow from efficient capital markets, advantages for the whole economy, not just the financial sector.
Last year's London Economics report sponsored by the European Commission, predicted a 1.1% increase in EU GDP over the next ten years from the full integration of capital markets. This includes a reduction in the cost of equity capital by 0.5%, and 0.4% in the cost of corporate bond finance.
The theory is good, even if such predictions may be optimistic. But the success of the F-SAP will depend on just how far we can turn the theory into a reality. Despite the rhetoric, we are still seeing protectionism from some quarters. Indeed, many European governments and institutions seem, at least in part, antagonistic towards the creation of competitive markets. Politicians don't find it easy to let go the reigns of domestic market control and certainly don’t always see the advantage to their consumers of giving competition the green light.
In the UK, we sometimes find this reluctance rather frustrating. London's success as a global financial centre has been founded in large part on a willingness to embrace competition and to look for wider opportunities to win new business, rather than to seek regulatory shelter and to rely on exploiting a declining market share.
At this point you would expect me to remind you that the UK certainly hasn't got everything right. At a time when we claim to lead Europe's financial services industry, the Government continues to levy stamp duty, which is a tax that drags on both our markets and our economy.
It is ironic that the rest of Europe either abolished or significantly reduced stamp duty on share transactions in response to the perceived threat from London and the modernisation of their markets over a decade ago.
Clearly now is not the ideal time in the economic cycle to be proposing any kind of tax reductions, and I recognise the very real fiscal problems facing the Chancellor. However, as our research has demonstrated, much of the fiscal benefit of abolishing the tax will be felt immediately even if the commitment is made some years in advance of it occurring.
In London we have recently enjoyed – if that's the right word! – a supportive regulatory environment.
An environment that is not too prescriptive, balanced between the interests of users and producers, principles not rules. In corporate governance for example, this approach has put UK standards at the forefront.
So it's only right to sound a note of caution here – to regulators and policy makers alike. Don't undermine this balanced package in the drive to integrate capital markets. In the debates on new standards for Europe and internationally, we are arguing for high levels of transparency and good practice in disclosure, existing key strengths of the London market. It is essential that in these negotiations London's standards are not diluted.
At the LSE, we believe we can be successful in this new more competitive framework. As I said at the start, it's competition that brings benefits for customers. Competition cuts costs, raises standards and spurs innovation.
Meeting customer needs - focus on costs
In competitive markets all providers are under pressure to drive down on costs and to innovate. At the LSE we have been managing down our own administrative costs and more important, working to provide more opportunities to our customers at lower cost. For instance, we now run our business on fewer than 500 people, down nearly 20% on two years ago.
I think our concern to ensure we get the best clearing arrangements for the market shows how important we understand costs to be. While I cannot add to what we have already said publicly about the negotiations with LCH and Eurex, I can promise you that our whole approach has been to ensure the lowest cost solution that offers greatest flexibility for market participants to develop their businesses.
Because trading is essentially a fixed cost business, our overall technology strategy has been to develop a low cost, scalable and flexible infrastructure. Not only does this provide operational cost savings but it also enables us to develop and deliver new products and services more quickly and cost-effectively than before. The investment we have put in to developing products and services specifically for our private client customers is also generating cost savings. Since our entry into the CREST Network market as the only new accredited provider we know that many of our customers have enjoyed benefits in terms of significantly lower costs – down by 50% in some cases.
Now with the acquisition of Proquote, we can offer a high-value lower-cost terminal product that offers the potential of direct access to the Exchange's markets to a much broader group of customers. "Information only" at £1,200 per year. A trading service for £1,800. Proquote is a significant investment for the Exchange and we aim to build on it going forward.
Eurosets
Our most recent initiative shows just how this focus on costs is enabling us to take advantage of the new opportunities for competition in Europe. The bespoke service to the Dutch market we announced on 14 October takes competition between European exchanges into a new phase.
The service, based on our SETS electronic order book, will offer a trading and reporting facility for all stocks in the AMX and AEX indices, which account for around 90% of trading in the Dutch market. Our trading technology provides us with the capacity to deliver the service at low marginal costs that we are able to pass on to the customer in the shape of lower fees.
Now I fully acknowledge that, at the outset, the SETS order book was not readily accessible to many private client brokers. That's changing and our long-term ambition is to make SETS a better option for private client brokers. SETS also brings benefits to the London market as a whole in the form of narrower spreads and deeper liquidity.
SETSmm
As you will be aware, our new SETSmm service went live on Monday. By combining the benefits of the SETS electronic order book with London's market making expertise, we believe SETSmm will be the most significant development in trading since the order book itself was introduced six years ago.
This will involve tackling any remaining disincentives to trade on SETS. We are seeking to work with settlement and clearing participants to deliver a lower cost solution to make SETS and SETSmm trading equally attractive with other trading approaches. I hope that we can also work with you to develop this option and widen the choices available.
Our Commitment to Private Client Brokers
In the two years since demutualisation, we have made rapid progress towards achieving our broader objectives, building on our world-class franchise, with a clearer focus now on meeting the needs of our customers and delivering value to shareholders. As part of that focus on the needs of customers, over the past few months we have been looking in more detail at our overall strategy for products and services to private client brokers and investment managers.
We are acutely aware of the importance of this segment of the London market and of the fact that trading on behalf of private clients currently accounts for up to 25% of trading by volume. Still not as high as we want, but now steadily increasing from fewer than 30,000 trades per day in Q1 to almost 40,000 trades in Q3.
Let me emphasise that we are committed to long-term mutually beneficial business relationships with our private client customers. We will continue to support firms in marketing whether through supplying brochures for ETFs or covered warrants. Our ongoing broker forum programme resumes in London next week. To underline our commitment and our wish to help promote your interests I am delighted that we have joined APCIMs as an Associate member.
Conclusion
So to conclude, there has been much talk recently about the future of equity markets. I believe that the future is bright. The equity market has grown, on average, 7% per annum since the beginning of the 20th century and is currently right on that trend.
But that does not mean to say that the future will look exactly like the past. The growing global market place is changing the nature of equity markets and we all have to learn new tricks to stay ahead of the game. National silos and protected market positions will be, are being, swept away by the twin forces of de-regulation and competition.
And against that backdrop, I want to leave you with three ideas that I believe will define the relationship between us going forward:
- Our future lies in grasping with both hands the opportunities presented by greater competition, that means developing low cost technology and value added services to compete with other execution venues at home and abroad.
- Competition will work in your favour because it is the best and quickest way to improve the quality of the markets and reduce the cost of the services you receive.
- 3. We will only make competition work for us if we take you with us, which is why we place so much importance on our customers and why we strive to maintain our open and fair business model.
Thank you
