:00:03. > :00:06.medal target. There was drama at the end of the day's events as
:00:06. > :00:15.Jonnie Peacock roared past the finish line to win the men's T44
:00:16. > :00:19.100 metres final. Now it's time for HARDtalk.
:00:19. > :00:21.The 2008 banking crash prompted a prolonged crisis of confidence in
:00:21. > :00:30.the financial institutions and markets that underpin Western
:00:30. > :00:32.capitalism. Governments on both sides of the Atlantic have tried to
:00:33. > :00:41.recalibrate the balance between risk and reward and to encourage
:00:41. > :00:45.genuine wealth creation rather than short term speculation. My guest,
:00:45. > :00:55.Xavier Rolet, is the CEO of the London Stock Exchange Group. Have
:00:55. > :01:09.
:01:09. > :01:16.financial markets learned the right lessons from recent history?
:01:16. > :01:21.Welcome to HARDtalk. Thank you for having me. You run a global
:01:21. > :01:26.financial business, but at its core is the London Stock Exchange, is it
:01:26. > :01:35.fair to assume that when the UK economy struggles, your business
:01:35. > :01:42.struggles? That is a fair question. We do handle our share of
:01:42. > :01:47.difficulties. Higher volatility in some places. Fundamentally, with an
:01:47. > :01:53.exchange, we are here to provide capital for companies. Debt, equity
:01:53. > :01:58.and other means so they can invest and so they can create jobs.
:01:58. > :02:04.make a profit on equities that are traded. If there is a lack of
:02:04. > :02:10.confidence in an economy you are in trouble. I have to say, when I look
:02:10. > :02:16.at today's environment, when I read the news and economic reports, I
:02:16. > :02:20.cannot help thinking to myself, commentators are just too gloomy.
:02:20. > :02:28.For the last six months we have seen a pick up in IPA businesses,
:02:28. > :02:33.we have seen a pick up in equity and debt racing. This is not making
:02:33. > :02:38.its way to GDP growth figures yet, but things are actually on the mend.
:02:38. > :02:43.If I may interrupt, I can see why you would want to believe that. I
:02:43. > :02:48.can see why in the real world, many people who are struggling with
:02:48. > :02:53.unemployment, frozen wages, a whole raft of issues, are struggling to
:02:53. > :02:56.see the light at the end of the tunnel. You went to see David
:02:56. > :03:01.Cameron recently and gave a presentation to Number Ten Downing
:03:01. > :03:04.Street, you gave your opinion on where the economic priorities
:03:04. > :03:14.should live. Where do you believe government policy should be
:03:14. > :03:20.directed right now? I agree with you, I a live in the real world
:03:20. > :03:25.like the rest. When you look at the potential for growth, the EU in
:03:25. > :03:32.general and the UK in particular have a fantastic opportunity, a
:03:32. > :03:37.fantastic card to play. Why do I say that? 4.8 million small and
:03:37. > :03:43.medium enterprise businesses in the UK. 23 million in the EU. They make
:03:43. > :03:47.a living out of innovating. A create jobs that cannot be easily
:03:47. > :03:52.globalised or displaced. These are the sectors, the companies that we
:03:52. > :03:57.must help. They need money to grow, at the moment they cannot get
:03:57. > :04:03.capital to grow. That is the number one issue. The solution to that
:04:03. > :04:07.conundrum, a lot of measures have been taken in the last 4-5 years to
:04:07. > :04:13.sort out the budget issues and deficit issues. These are
:04:13. > :04:19.disciplined measures that must be taken. Where are the solution lies,
:04:19. > :04:23.I believe, we are seeing increased evidence of that fact, is in
:04:23. > :04:30.helping stimulate small and mid- sized enterprises to create new
:04:30. > :04:36.jobs. 4.8 million of these businesses creating a single new
:04:36. > :04:42.job, think about that. You have created a clarion call for new
:04:42. > :04:46.investment in equities in small and medium-sized businesses. We are so
:04:46. > :04:51.focused on getting the bank to lend to them, what is more effective is
:04:51. > :04:58.to get investors to buy into these small companies, to take equity and
:04:58. > :05:01.follow through on that by helping them grow. It seems that is a very
:05:01. > :05:06.self-interested argument. Part of the argument is there needs to be
:05:06. > :05:11.less regulation of the way those equity investments are handled in
:05:11. > :05:21.small companies. I have to deal with the self interest argument. UK
:05:21. > :05:26.equity trading represents 10% of our total revenue, in fact a lot
:05:26. > :05:30.less than now dead business. I am not suggesting this is the only
:05:30. > :05:38.motivation you have. It is to your advantage to encourage the notion
:05:38. > :05:40.the best way to get the economy moving is in a sense to kick start
:05:40. > :05:47.the equity investment environment rather than focus all effort on
:05:47. > :05:54.bank lending. It is not about the Stock Exchange. It is about what
:05:54. > :05:59.financial tool is the right tool to finance. If you were to put
:05:59. > :06:03.yourself in the shoes of an entrepreneur, let's say you worked
:06:03. > :06:08.with a top university for a 10-15 years, you have come up with a
:06:08. > :06:18.great idea. You want to launch a buyer take business, software
:06:18. > :06:20.
:06:20. > :06:28.business, sustainable business, you do not have much equity. --
:06:28. > :06:32.biotechnology business. The banks risk is only in the interest you
:06:32. > :06:36.are going to pay every month. There is a mismatch between what you have
:06:36. > :06:46.to provide in order to secure the money and the returns afforded to
:06:46. > :06:46.
:06:46. > :06:53.the banks. Bank debt is the wrong tool, the wrong asset task to
:06:53. > :07:03.finance this. We are asking for a rich calibration of the system. --
:07:03. > :07:07.
:07:07. > :07:10.reach -- recalibration. Where the interests of the investor and
:07:10. > :07:16.entrepreneur are aligned. investor takes a share in the
:07:16. > :07:20.company. No more second mortgage on the house, potentially large
:07:20. > :07:24.rewards if the company is successful. This is where your
:07:24. > :07:31.message does not suit the temper of the times. You are saying right now
:07:31. > :07:35.in Britain, there is too much restrictive regulation concerning
:07:35. > :07:40.equity investment in small and medium-sized companies. You have
:07:40. > :07:44.said that regulatory changes which are already in the pipeline are
:07:44. > :07:53.effectively killing the equity market. It is not just in the UK.
:07:53. > :08:00.There has been an over-regulation hysterically of equity markets. --
:08:00. > :08:04.historically. Where have you have been for the last five years? What
:08:04. > :08:09.the public want is tighter regulation of financial markets
:08:09. > :08:17.because they have been so badly burned. Financial markets is the
:08:17. > :08:22.key. You are right. The full burden of regulation for the last several
:08:22. > :08:28.decades has been almost exclusively directed at equities. Very little,
:08:28. > :08:33.no little regulation in the bond market, annuities and in many of
:08:33. > :08:39.the financial assets classifications. Equities are the
:08:39. > :08:43.system for the whole system. We are at a stage today, it is not just
:08:43. > :08:49.about regulation, it is about the fiscal imbalances, the
:08:49. > :08:54.deductibility of debt on one hand compared to the quadruple taxation.
:08:54. > :08:59.You think equity investors are taxed too much. Four times.
:08:59. > :09:05.difficult argument to make in an era of austerity. The general
:09:05. > :09:08.public, most of whom have few if any share is, maybe look with a
:09:08. > :09:15.raised eyebrow to an initiative that would give tax breaks to
:09:15. > :09:22.shareholders. If you are going to tax equities four times in their
:09:22. > :09:27.life cycle while asking taxpayers to subsidise debt, which is how
:09:27. > :09:34.deductibility works, you are in balancing the system at a time when
:09:34. > :09:39.we believe equity as an asset class is the solution to solve this
:09:39. > :09:43.capital raising conundrum. To put capital in the hands of
:09:43. > :09:53.entrepreneurs so we get those 23 million small and medium
:09:53. > :10:00.enterprises to start creating jobs. There is an interesting statistic,
:10:00. > :10:06.a tidy 3 million for 27 million people unemployed. -- 23 million.
:10:06. > :10:10.It sounds easy when you put it that way. We have a crisis of confidence.
:10:10. > :10:15.There is no question that a crisis of confidence in financial
:10:15. > :10:21.institutions, corporate governance, in the city of London and the way
:10:21. > :10:27.it has worked in the recent past, you and your company are in the
:10:27. > :10:36.thick of that problem. I think there is definitely, more than I
:10:36. > :10:38.have ever seen in my life and career, a question addressed at the
:10:38. > :10:43.capitalist economy and the capitalist system. I do not think
:10:43. > :10:49.anybody could argue that a capital based economy is not the best
:10:49. > :10:58.system to create wealth. To create economic activity. We have tried
:10:58. > :11:03.many other systems through human history and they have tended to
:11:03. > :11:09.create less well. We are in the biggest crisis facing the catalyst
:11:09. > :11:19.system in 70 years. That is the point. -- capitalist. The thing
:11:19. > :11:19.
:11:19. > :11:23.that people do not like, that I do not like, two things. The boom-bust
:11:23. > :11:29.cycle which has not agreeable with human nature. That extreme
:11:29. > :11:35.volatility. Second, if capitalism is good at creating wealth it is
:11:35. > :11:43.not good at distributing it. Or at least providing even distribution
:11:43. > :11:49.of that wealth across the entire... 70% in a recent YouGov poll said
:11:49. > :11:59.that corporate greed, an important word, was in their words
:11:59. > :12:01.
:12:01. > :12:08.responsible for the economic malaise that we are currently in.
:12:08. > :12:13.Your message today, the public should embrace the notion of equity
:12:13. > :12:19.investment as a means to kick start the general economy. If the public
:12:19. > :12:22.looks at the way companies are run right now, it might wonder whether
:12:22. > :12:30.Equity investment and trust in equities and trust in corporate
:12:30. > :12:34.governance is a white -- wise thing to do. There have been stories
:12:34. > :12:42.about wild renumeration packages for unsuccessful financial
:12:42. > :12:49.institutions. Your renumeration is worth scrutinising. You were paid
:12:49. > :12:54.�700,000 last year as a basic salary. A bonus package that
:12:54. > :13:00.amounted to �1.5 million, taking you over �2 million in total. Would
:13:00. > :13:07.you not have worked hard if you were paid less? The renumeration is
:13:07. > :13:12.formulaic. We succeed, I get remunerated, if we do not, I do not.
:13:12. > :13:16.I do not think there is a great deal of controversy attached to
:13:16. > :13:21.small and medium-sized enterprises. Most people recognise they have not
:13:21. > :13:26.been characterised by the excesses that have characterised some of the
:13:26. > :13:30.larger components of the economy, particularly the financial industry.
:13:30. > :13:36.The notion of making it easier for entrepreneurs, particularly
:13:36. > :13:44.innovators to raise capital is not a nation that most people -- that
:13:44. > :13:48.were agreed most people. Be. We want to promote his, is there a
:13:48. > :13:54.connection between a fiscal system that increases leverage and
:13:54. > :13:59.increases the amplitude of that boom-vast system. -- the point.
:14:00. > :14:06.That goes back to my point about capitalism not being liked because
:14:06. > :14:10.of the boom-bust cycle. All we do is increase leverage in good times,
:14:10. > :14:20.every single crisis that we have dealt within the last 200 years has
:14:20. > :14:25.Balancing the system will take care of that volatility. I understand
:14:25. > :14:31.the point you're making and the differentiation between small and
:14:31. > :14:36.medium-sized enterprises, but I want to direct this question to you,
:14:36. > :14:41.do you believe that the signals sent by remuneration packages like
:14:41. > :14:47.yours is a healthy one to encourage the general public to believe that
:14:47. > :14:53.the corporate sector is behaving responsibly? It is essential that
:14:53. > :14:59.remuneration be performance-based. It brings rewards, but failure
:14:59. > :15:02.doesn't. Why are those rules acceptable in the financial sector
:15:02. > :15:06.when they are not the norm in so many other walks of life. If a
:15:06. > :15:15.teacher teaches well he does not get a bonus three times his salary,
:15:15. > :15:18.in fact he probably doesn't get on at all. Across most jobs in those
:15:18. > :15:24.sectors the system your outlining his quite abnormal. Their Allah-
:15:24. > :15:28.Ditta different motivations for different careers. -- there are
:15:28. > :15:32.different. To compare one against the other is not appropriate.
:15:32. > :15:38.is the downside risk for you? What is the risk that means the reward
:15:38. > :15:43.for you should amount to more than �2 million? Lack of success, in the
:15:43. > :15:46.last three years the London Stock Exchange has been quite successful
:15:46. > :15:52.from both a market share and a shareholder return perspective and
:15:52. > :15:57.the initiatives that we launched have meant that my remuneration
:15:57. > :16:01.package gave me certain remuneration figures. To compare
:16:01. > :16:08.that with different walks of life and work loads is not necessarily
:16:08. > :16:14.very fair. People choose careers based on what they are attracted to.
:16:14. > :16:19.Let's now examine your contention that you have led LSE group in a
:16:19. > :16:22.very positive way. It seems to me what you're desiring to do is turn
:16:23. > :16:27.the London Stock Exchange into a truly global financial services
:16:27. > :16:31.giant. Very much so. You have been knocked back in some of your
:16:31. > :16:36.efforts for example to essentially take over the Canadian exchange,
:16:36. > :16:41.that didn't happen. You have also tried to move into more complicated
:16:42. > :16:46.derivative trading, buying up the market maker in a derivative sector.
:16:46. > :16:53.Are you sure, given what has happened since 2007, that indulging
:16:53. > :16:58.in this highly complex financial derivatives world is where you want
:16:58. > :17:02.to take your business. There are four key components of success in
:17:02. > :17:06.our industry. If you look at the history of the London Stock
:17:06. > :17:11.Exchange in the last 10/15 years it has been characterised by a great
:17:11. > :17:16.success in equities, historically, particularly in regard to the IPO
:17:16. > :17:20.business. There have been a number of areas post raid, clearing,
:17:20. > :17:25.settlement, derivatives, where other competitors have actually
:17:25. > :17:29.grow more quickly and grown faster on the world scale. Our strategy in
:17:29. > :17:35.the last three years has been multi- fold, but particularly
:17:35. > :17:40.linked to the diversification of our profile of. Diversifying our
:17:40. > :17:44.profile for example into post trade. September 2009 at our investors'
:17:44. > :17:48.conference we said we would double the share post rate for example and
:17:48. > :17:52.we would grow the derivatives business and we would grow in
:17:52. > :17:57.intellectual property, which we have done with the FTSE transaction.
:17:57. > :18:01.Looking at the diversified profile of the Exchange today it is beyond
:18:01. > :18:06.recognition verses where the company was three years ago. But
:18:06. > :18:11.the point off all this is not just about shareholder value or
:18:11. > :18:16.individuals compensation Career Path. The point is exchanges like
:18:16. > :18:21.ours are fundamentally here to support companies seeking to raise
:18:21. > :18:25.capital. In that respect, would you look at current performance for
:18:25. > :18:29.example in the A market, the recent launch of an audio book, we have
:18:29. > :18:34.raised very substantial amounts, in fact total last year... I will
:18:34. > :18:38.finish with this, it's an important statistic, the London Stock
:18:38. > :18:45.Exchange raised the listed public securities to the amount of one
:18:45. > :18:48.trillion pounds. You define the role of exchanges like your own as
:18:48. > :18:52.quite a simple one and in most senses to most people quite a
:18:52. > :18:59.simple one, to allow companies to raise money through equity
:18:59. > :19:03.investment. But there's something else happening in exchanges,
:19:03. > :19:06.including your own exchange, high- frequency trading. That is not
:19:06. > :19:11.about long-term investments to Crowe companies, it is about short-
:19:11. > :19:17.term speculation indulge in by companies using the most powerful
:19:17. > :19:23.supercomputers with highly complex algorithms to gain the market. That
:19:23. > :19:33.is what is happening. -- Crowe. High-frequency trading is a very
:19:33. > :19:36.
:19:36. > :19:41.sensitive come. Where does it come? In the EU there were a set of laws
:19:41. > :19:46.in the US where the principle of introduction of competition in the
:19:46. > :19:50.exchange area was supported and enacted. You ended up in an
:19:50. > :19:54.environment where for the first time in history, it's important
:19:54. > :19:58.that I give you the historical context if you want to understand
:19:58. > :20:02.what high-frequency trading is about, it was definitely not even
:20:02. > :20:06.invented or promoted by a exchangers, it is the result of
:20:06. > :20:11.regulatory change that was introduced in exchanges. We found
:20:11. > :20:18.ourselves in a situation with the same security and these across a
:20:18. > :20:23.multitude of different venues. -- and companies were quoted across.
:20:23. > :20:27.If you find yourself with the same company quoted across 50 or more
:20:27. > :20:32.platforms the risk that the price divergence will create inequity in
:20:32. > :20:40.the way investments by securities. Some might have been buying it at a
:20:40. > :20:46.price much higher than offered in another venue. You you need an
:20:46. > :20:49.activity called high-frequency trading that retains synchronicity.
:20:49. > :20:53.It can spot anomalies in a billionth of a second and can
:20:53. > :20:59.execute a trade in a billionth of a second, which no human trader can
:20:59. > :21:03.do. This is what the watchdog group in the US, finance group, said of
:21:03. > :21:07.high-frequency trading, "Utterly disconnected from the fundamental
:21:07. > :21:13.value of the securities being traded. It is purely speculative
:21:13. > :21:17.and it degrades the price formation mechanism". Do you agree with that?
:21:17. > :21:23.It is not speculative. It maintains synchronicity between the
:21:23. > :21:29.Securities. They have no interest in the meaningful value of it is
:21:29. > :21:34.simply about short term, not necessarily a billionth of a second,
:21:35. > :21:40.but short-term profit-making. profit-making and it it eliminates
:21:40. > :21:45.inefficiencies across multiple venues. But one point remains, and
:21:45. > :21:50.it's a simple truth, this particular change has nothing to do,
:21:50. > :21:55.and was never promoted or inspired was suggested by exchanges. That is
:21:55. > :21:59.not necessarily the important point. The important point is that it is
:21:59. > :22:05.speculative in many people's view and damaging the real value of
:22:05. > :22:10.equities, but also it can go wrong. In a 2010 we saw a flash crashed in
:22:10. > :22:14.the US stock market, it went down 600 points in 20 minutes. One
:22:14. > :22:18.company, Accenture, one of the biggest companies in the world, was
:22:18. > :22:22.momentarily worth pennies. Disastrous for many investors. It
:22:22. > :22:28.should be controlled. That would be a question for US colleagues and
:22:28. > :22:32.exchanges. And for regulators? course. And for a man in this
:22:32. > :22:37.interview has called for less regulation, do you accept that
:22:37. > :22:41.there must be more regulation in this area? The point I was making
:22:41. > :22:46.earlier is that we need a re calibration. There's no point at a
:22:46. > :22:51.time where equity is the right system for the entire burden of
:22:51. > :22:55.regulation to be fixated solely on the equities and equity as an asset.
:22:55. > :23:00.But on this particular aspect of your business, which, according to
:23:00. > :23:03.the latest business, 60 % of trades on the US stock market are driven
:23:03. > :23:09.by high-frequency trading. Do you accept it must be regulated and
:23:09. > :23:14.controlled? I think actually in the UK, are not concerned about US
:23:14. > :23:18.equity markets, that would be a question for US colleagues.
:23:18. > :23:22.will be if you buy a US business like Nasdaq. That is speculation
:23:23. > :23:26.and I'm not going to speculate. To comment and talk about the UK
:23:26. > :23:30.markets, we have not had a flash crash, we have all the appropriate
:23:30. > :23:35.regulation including circuit breakers which were wrecked
:23:35. > :23:39.recently set up in the United States. Things go wrong in Britain
:23:39. > :23:42.as they will in the United States. Yes, but your question was about
:23:42. > :23:46.regulation and my answer is that the current regulartory framework
:23:47. > :23:51.in the UK is the appropriate one to ensure that these activities are
:23:51. > :23:54.properly regulated and monitored. We began talking about your view of
:23:54. > :23:58.the global economy, you said you didn't want to be too gloomy. You
:23:58. > :24:02.have talked about your global ambitions. In the long run are we
:24:02. > :24:07.going to see a globalised economy where companies like yours are
:24:07. > :24:12.running markets all over the world? I think so. Not all exchanges will
:24:12. > :24:17.be global. I think a fairly small number, probably less than 10.
:24:17. > :24:22.Global infrastructure companies will be able to do other things on