Even if public outcry and political scorn levelled at the capital markets is largely unwarranted, it must nonetheless be addressed, a group of Europe’s senior most capital markets minds believe.
In yesterday’s opening panel discussion at TradeTech Europe in London, exchange and asset management representatives fiercely debated the role and impact of capital markets on society, questioning whether or not it was possible to create fairer and more transparent markets.
“While our market structure models may give value to the real economy, we need to respond to the broad critiques of both the occupy movement and politicians,” said Ruben Lee, CEO, Oxford Finance Group. “You can’t ignore the chief concern of the Occupy movement – that the markets serve the 1% and not the 99%. I think the argument is false but we need to respond to it.”
Similarly, Lee said the argument many politicians make – that the markets are too excessively focused on the activity of trading and that the needs of the wider economy are not being served – is also false but nonetheless needs to be addressed by the industry.
Lee said Europe needed to look to the United States, where small- and medium-sized enterprises (SMEs) are comparatively well served by capital markets. In the UK, three per cent of SMEs raise funds through equity finance but in the US, the proportion rises to 25%.
Framework for competition
“Everyone is competing to make profit and as long as they compete in a sound regulatory framework, it should be ok,” said Natan Tiefenbrun, head of product, LSE Equities and Derivatives, Turquoise. “But we must ensure that framework pushes competition. The Deutsche Börse/NYSE Euronext merger failed because the parties wanted to maintain an anti-competitive structure. Fragmentation in Europe is a great example of how regulation can make benefits for users of the system.”
Baited by the remarks of his competitor and referring to the LSE’s planned merger with LCH.Clearnet, Rainer Riess, managing director, Deutsche Börse, said he had been pleased to see the LSE choosing to follow the German exchange group’s business model. But in terms of industry debate, Riess claimed discussions around liquidity fragmentation and venue definition often remained “too myopic” and did not match public questions or European policy debates.
“The industry needs to rethink how it projects itself. We as Europe need to think about what market structure does the real economy need from us to provide capital and handle risk transparently,” said Riess. “The MTF/exchange debate is completely the wrong subject. SME issuers don’t know where their stock is traded or have enough data.”
Riess said MiFID had failed to take care of these transparency issues and that it was up to MiFID II to sort them out.
“The horizontal/vertical silo debate is also too myopic. We shouldn’t lose sight of how we can give transparency to regain credibility with policy makers and SMEs,” he said.
But Tiefenbrun branded Riess’s assessment of the current regulatory debate as “subterfuge”.
“Nothing you have said speaks to silos and I think that’s a manipulative approach,” said Tiefenbrun, adding, “The LSE is not adopting Deutsche Börse’s model. We have given our shareholders assurance we would be open and they wouldn’t have voted for any of our propositions if they didn’t think we would be.”
Time to deliver
Mark Hemsley, CEO of BATS Chi-X Europe, pointed out that consolidated tape proposals already contained in current MiFID II drafts were one of the antidotes to transparency for SMEs.
“These proposals need to deliver but they are positive moves,” Hemsley said. “But what we really need to talk about for the benefit of the real economy in Europe is a pan-European market.”
Hemsley said the industry needed to better explain itself to better to the general public, using a model that everyone can understand.
“We take money from pension funds and high net worth individuals and all act as agents in a process, extracting fees and each stage along the way. That’s fine, but the model needs to be better understood and competitive,” he said.
Richard Lacaille, Global CIO of State Street Global Advisers, said fragmentation and competition between venues had undoubtedly brought benefits to the end investor.
“Asset managers could collapse their costs substantially if there was a monopoly exchange but this would be worse for our clients,” said Lacaille.
Ultimately, the group of experts at the first panel of this year’s conference remained split key issues relating to the future of Europe’s capital markets. When moderator and conference chairman Alasdair Haynes, former CEO of Chi-X Europe, asked where the panel thought the industry would be in ten years time, Lee, Hemsley and Riess felt the industry would largely look the same, Tiefenbrun believed new models would become the norm, while Lacaille thought the capital markets would look very different.