Xavier Rolet - Chief Executive, London Stock Exchange Group HARDtalk

medal target. There was drama at the end of the day's events as

Jonnie Peacock roared past the finish line to win the men's T44

100 metres final. Now it's time for HARDtalk.

The 2008 banking crash prompted a prolonged crisis of confidence in

the financial institutions and markets that underpin Western

capitalism. Governments on both sides of the Atlantic have tried to

recalibrate the balance between risk and reward and to encourage

genuine wealth creation rather than short term speculation. My guest,

Xavier Rolet, is the CEO of the London Stock Exchange Group. Have

financial markets learned the right lessons from recent history?

Welcome to HARDtalk. Thank you for having me. You run a global

financial business, but at its core is the London Stock Exchange, is it

fair to assume that when the UK economy struggles, your business

struggles? That is a fair question. We do handle our share of

difficulties. Higher volatility in some places. Fundamentally, with an

exchange, we are here to provide capital for companies. Debt, equity

and other means so they can invest and so they can create jobs.

make a profit on equities that are traded. If there is a lack of

confidence in an economy you are in trouble. I have to say, when I look

at today's environment, when I read the news and economic reports, I

cannot help thinking to myself, commentators are just too gloomy.

For the last six months we have seen a pick up in IPA businesses,

we have seen a pick up in equity and debt racing. This is not making

its way to GDP growth figures yet, but things are actually on the mend.

If I may interrupt, I can see why you would want to believe that. I

can see why in the real world, many people who are struggling with

unemployment, frozen wages, a whole raft of issues, are struggling to

see the light at the end of the tunnel. You went to see David

Cameron recently and gave a presentation to Number Ten Downing

Street, you gave your opinion on where the economic priorities

should live. Where do you believe government policy should be

directed right now? I agree with you, I a live in the real world

like the rest. When you look at the potential for growth, the EU in

general and the UK in particular have a fantastic opportunity, a

fantastic card to play. Why do I say that? 4.8 million small and

medium enterprise businesses in the UK. 23 million in the EU. They make

a living out of innovating. A create jobs that cannot be easily

globalised or displaced. These are the sectors, the companies that we

must help. They need money to grow, at the moment they cannot get

capital to grow. That is the number one issue. The solution to that

conundrum, a lot of measures have been taken in the last 4-5 years to

sort out the budget issues and deficit issues. These are

disciplined measures that must be taken. Where are the solution lies,

I believe, we are seeing increased evidence of that fact, is in

helping stimulate small and mid- sized enterprises to create new

jobs. 4.8 million of these businesses creating a single new

job, think about that. You have created a clarion call for new

investment in equities in small and medium-sized businesses. We are so

focused on getting the bank to lend to them, what is more effective is

to get investors to buy into these small companies, to take equity and

follow through on that by helping them grow. It seems that is a very

self-interested argument. Part of the argument is there needs to be

less regulation of the way those equity investments are handled in

small companies. I have to deal with the self interest argument. UK

equity trading represents 10% of our total revenue, in fact a lot

less than now dead business. I am not suggesting this is the only

motivation you have. It is to your advantage to encourage the notion

the best way to get the economy moving is in a sense to kick start

the equity investment environment rather than focus all effort on

bank lending. It is not about the Stock Exchange. It is about what

financial tool is the right tool to finance. If you were to put

yourself in the shoes of an entrepreneur, let's say you worked

with a top university for a 10-15 years, you have come up with a

great idea. You want to launch a buyer take business, software

business, sustainable business, you do not have much equity. --

biotechnology business. The banks risk is only in the interest you

are going to pay every month. There is a mismatch between what you have

to provide in order to secure the money and the returns afforded to

the banks. Bank debt is the wrong tool, the wrong asset task to

finance this. We are asking for a rich calibration of the system. --

reach -- recalibration. Where the interests of the investor and

entrepreneur are aligned. investor takes a share in the

company. No more second mortgage on the house, potentially large

rewards if the company is successful. This is where your

message does not suit the temper of the times. You are saying right now

in Britain, there is too much restrictive regulation concerning

equity investment in small and medium-sized companies. You have

said that regulatory changes which are already in the pipeline are

effectively killing the equity market. It is not just in the UK.

There has been an over-regulation hysterically of equity markets. --

historically. Where have you have been for the last five years? What

the public want is tighter regulation of financial markets

because they have been so badly burned. Financial markets is the

key. You are right. The full burden of regulation for the last several

decades has been almost exclusively directed at equities. Very little,

no little regulation in the bond market, annuities and in many of

the financial assets classifications. Equities are the

system for the whole system. We are at a stage today, it is not just

about regulation, it is about the fiscal imbalances, the

deductibility of debt on one hand compared to the quadruple taxation.

You think equity investors are taxed too much. Four times.

difficult argument to make in an era of austerity. The general

public, most of whom have few if any share is, maybe look with a

raised eyebrow to an initiative that would give tax breaks to

shareholders. If you are going to tax equities four times in their

life cycle while asking taxpayers to subsidise debt, which is how

deductibility works, you are in balancing the system at a time when

we believe equity as an asset class is the solution to solve this

capital raising conundrum. To put capital in the hands of

entrepreneurs so we get those 23 million small and medium

enterprises to start creating jobs. There is an interesting statistic,

a tidy 3 million for 27 million people unemployed. -- 23 million.

It sounds easy when you put it that way. We have a crisis of confidence.

There is no question that a crisis of confidence in financial

institutions, corporate governance, in the city of London and the way

it has worked in the recent past, you and your company are in the

thick of that problem. I think there is definitely, more than I

have ever seen in my life and career, a question addressed at the

capitalist economy and the capitalist system. I do not think

anybody could argue that a capital based economy is not the best

system to create wealth. To create economic activity. We have tried

many other systems through human history and they have tended to

create less well. We are in the biggest crisis facing the catalyst

system in 70 years. That is the point. -- capitalist. The thing

that people do not like, that I do not like, two things. The boom-bust

cycle which has not agreeable with human nature. That extreme

volatility. Second, if capitalism is good at creating wealth it is

not good at distributing it. Or at least providing even distribution

of that wealth across the entire... 70% in a recent YouGov poll said

that corporate greed, an important word, was in their words

responsible for the economic malaise that we are currently in.

Your message today, the public should embrace the notion of equity

investment as a means to kick start the general economy. If the public

looks at the way companies are run right now, it might wonder whether

Equity investment and trust in equities and trust in corporate

governance is a white -- wise thing to do. There have been stories

about wild renumeration packages for unsuccessful financial

institutions. Your renumeration is worth scrutinising. You were paid

�700,000 last year as a basic salary. A bonus package that

amounted to �1.5 million, taking you over �2 million in total. Would

you not have worked hard if you were paid less? The renumeration is

formulaic. We succeed, I get remunerated, if we do not, I do not.

I do not think there is a great deal of controversy attached to

small and medium-sized enterprises. Most people recognise they have not

been characterised by the excesses that have characterised some of the

larger components of the economy, particularly the financial industry.

The notion of making it easier for entrepreneurs, particularly

innovators to raise capital is not a nation that most people -- that

were agreed most people. Be. We want to promote his, is there a

connection between a fiscal system that increases leverage and

increases the amplitude of that boom-vast system. -- the point.

That goes back to my point about capitalism not being liked because

of the boom-bust cycle. All we do is increase leverage in good times,

every single crisis that we have dealt within the last 200 years has

Balancing the system will take care of that volatility. I understand

the point you're making and the differentiation between small and

medium-sized enterprises, but I want to direct this question to you,

do you believe that the signals sent by remuneration packages like

yours is a healthy one to encourage the general public to believe that

the corporate sector is behaving responsibly? It is essential that

remuneration be performance-based. It brings rewards, but failure

doesn't. Why are those rules acceptable in the financial sector

when they are not the norm in so many other walks of life. If a

teacher teaches well he does not get a bonus three times his salary,

in fact he probably doesn't get on at all. Across most jobs in those

sectors the system your outlining his quite abnormal. Their Allah-

Ditta different motivations for different careers. -- there are

different. To compare one against the other is not appropriate.

is the downside risk for you? What is the risk that means the reward

for you should amount to more than �2 million? Lack of success, in the

last three years the London Stock Exchange has been quite successful

from both a market share and a shareholder return perspective and

the initiatives that we launched have meant that my remuneration

package gave me certain remuneration figures. To compare

that with different walks of life and work loads is not necessarily

very fair. People choose careers based on what they are attracted to.

Let's now examine your contention that you have led LSE group in a

very positive way. It seems to me what you're desiring to do is turn

the London Stock Exchange into a truly global financial services

giant. Very much so. You have been knocked back in some of your

efforts for example to essentially take over the Canadian exchange,

that didn't happen. You have also tried to move into more complicated

derivative trading, buying up the market maker in a derivative sector.

Are you sure, given what has happened since 2007, that indulging

in this highly complex financial derivatives world is where you want

to take your business. There are four key components of success in

our industry. If you look at the history of the London Stock

Exchange in the last 10/15 years it has been characterised by a great

success in equities, historically, particularly in regard to the IPO

business. There have been a number of areas post raid, clearing,

settlement, derivatives, where other competitors have actually

grow more quickly and grown faster on the world scale. Our strategy in

the last three years has been multi- fold, but particularly

linked to the diversification of our profile of. Diversifying our

profile for example into post trade. September 2009 at our investors'

conference we said we would double the share post rate for example and

we would grow the derivatives business and we would grow in

intellectual property, which we have done with the FTSE transaction.

Looking at the diversified profile of the Exchange today it is beyond

recognition verses where the company was three years ago. But

the point off all this is not just about shareholder value or

individuals compensation Career Path. The point is exchanges like

ours are fundamentally here to support companies seeking to raise

capital. In that respect, would you look at current performance for

example in the A market, the recent launch of an audio book, we have

raised very substantial amounts, in fact total last year... I will

finish with this, it's an important statistic, the London Stock

Exchange raised the listed public securities to the amount of one

trillion pounds. You define the role of exchanges like your own as

quite a simple one and in most senses to most people quite a

simple one, to allow companies to raise money through equity

investment. But there's something else happening in exchanges,

including your own exchange, high- frequency trading. That is not

about long-term investments to Crowe companies, it is about short-

term speculation indulge in by companies using the most powerful

supercomputers with highly complex algorithms to gain the market. That

is what is happening. -- Crowe. High-frequency trading is a very

sensitive come. Where does it come? In the EU there were a set of laws

in the US where the principle of introduction of competition in the

exchange area was supported and enacted. You ended up in an

environment where for the first time in history, it's important

that I give you the historical context if you want to understand

what high-frequency trading is about, it was definitely not even

invented or promoted by a exchangers, it is the result of

regulatory change that was introduced in exchanges. We found

ourselves in a situation with the same security and these across a

multitude of different venues. -- and companies were quoted across.

If you find yourself with the same company quoted across 50 or more

platforms the risk that the price divergence will create inequity in

the way investments by securities. Some might have been buying it at a

price much higher than offered in another venue. You you need an

activity called high-frequency trading that retains synchronicity.

It can spot anomalies in a billionth of a second and can

execute a trade in a billionth of a second, which no human trader can

do. This is what the watchdog group in the US, finance group, said of

high-frequency trading, "Utterly disconnected from the fundamental

value of the securities being traded. It is purely speculative

and it degrades the price formation mechanism". Do you agree with that?

It is not speculative. It maintains synchronicity between the

Securities. They have no interest in the meaningful value of it is

simply about short term, not necessarily a billionth of a second,

but short-term profit-making. profit-making and it it eliminates

inefficiencies across multiple venues. But one point remains, and

it's a simple truth, this particular change has nothing to do,

and was never promoted or inspired was suggested by exchanges. That is

not necessarily the important point. The important point is that it is

speculative in many people's view and damaging the real value of

equities, but also it can go wrong. In a 2010 we saw a flash crashed in

the US stock market, it went down 600 points in 20 minutes. One

company, Accenture, one of the biggest companies in the world, was

momentarily worth pennies. Disastrous for many investors. It

should be controlled. That would be a question for US colleagues and

exchanges. And for regulators? course. And for a man in this

interview has called for less regulation, do you accept that

there must be more regulation in this area? The point I was making

earlier is that we need a re calibration. There's no point at a

time where equity is the right system for the entire burden of

regulation to be fixated solely on the equities and equity as an asset.

But on this particular aspect of your business, which, according to

the latest business, 60 % of trades on the US stock market are driven

by high-frequency trading. Do you accept it must be regulated and

controlled? I think actually in the UK, are not concerned about US

equity markets, that would be a question for US colleagues.

will be if you buy a US business like Nasdaq. That is speculation

and I'm not going to speculate. To comment and talk about the UK

markets, we have not had a flash crash, we have all the appropriate

regulation including circuit breakers which were wrecked

recently set up in the United States. Things go wrong in Britain

as they will in the United States. Yes, but your question was about

regulation and my answer is that the current regulartory framework

in the UK is the appropriate one to ensure that these activities are

properly regulated and monitored. We began talking about your view of

the global economy, you said you didn't want to be too gloomy. You

have talked about your global ambitions. In the long run are we

going to see a globalised economy where companies like yours are

running markets all over the world? I think so. Not all exchanges will

be global. I think a fairly small number, probably less than 10.

Global infrastructure companies will be able to do other things on