The exchange with an insatiable appetite to disrupt
- Future of Finance
- Nov 21, 2023
- 37 min read
Updated: Feb 4
A Future of Finance interview with Alasdair Haynes, CEO of Aquis Exchange
Competition in equities trading in developed markets is now so well-established that it seems to have existed forever. In reality, it is as much a creation of regulators as of the digital technology that has enabled stock markets to dispense with physical floors and reach across national borders. True, NASDAQ can trace its history back to 1971, but competition was massively accelerated in the United States by Regulation National Market System (or Reg NMS) of 2005. A similar measure in Europe, the first iteration of the Markets in Financial Instruments Directive (MiFID) in 2007, began the process of breaking the domestic stock exchange monopolies of the member-states of the European Union (EU). But now the future lies clearly with the digitisation of data and the digitalisation of processes. Someone who has been at the heart of disruption and innovation in the stock exchange industry throughout the years of upheaval is Alasdair Haynes, the founder and CEO of Aquis Exchange, which he set up in 2012 after spells as CEO at both Chi-X Europe (now part of Cboe) and ITG International (now Virtu), to prove his belief that subscription revenue and the Cloud are as relevant to stock exchanges as large corporations. He spoke to Dominic Hobson, co-founder of Future of Finance.
Key Insights
A subscription-based exchange is superior because reducing the cost of transacting additional business to zero increases trading activity and enhances liquidity.
Managing the activities of proprietary traders not trading on behalf of clients ensures they do not depress prices by taking liquidity out of the market without contributing any.
Markets will eventually settle on T+0, lowering costs and risks, but not via “atomic” settlement because that eliminates the capital and liquidity savings of pre-settlement netting.
Listed growth companies below a certain size should be protected from short-sellers because they can collapse the share price before such companies have fulfilled their growth potential.
Brexit has created costs (an EU presence is required for London-based exchanges trading European stocks) but also an opportunity for jurisdictions to compete on the quality of their regulation.
The costs of going public are creating a structural bias in favour of the private equity industry, forcing entrepreneurs to spend more time seeking financing than innovating and scaling.
Over-regulation creates transaction costs (enjoyed mainly by professional advisers such as lawyers and accountants) and complexities that deter retail investors.
The United Kingdom lacks neither a risk appetite (5 million citizens own cryptocurrencies) nor risk capital to invest (£1.8 trillion in cash is in interest-bearing bank accounts).
UK institutional investors are under-invested in equities, particularly of the unlisted, high growth variety, and the Mansion House Compact (by which asset managers promise to increase their exposure to unlisted assets to 5 per cent of holdings by 2030) will not fix the problem.
The UK equity market needs to simulate the success of the cryptocurrency markets in making access to on-exchange investments simpler and faster.
Freeing gains on investments in small and mid-cap growth stocks from capital gains tax would incentivise investment in high growth companies without damaging government revenues.
A consolidated tape for Europe will increase competition in the provision and sale of price data, from which national exchange monopolies are presently enjoying rents.
The Cloud transforms the economics of providing next-generation, stock exchange-grade technology, services and data at a consistent speed and latency.
Tokenisation, beginning with the asset-backed variety, is likely to succeed in the long run because it reduces costs by disintermediating layers of unnecessary service provision.
Competition between exchanges is the driver of efficiency and quality-enhancing innovations that will attract retail investors and rejuvenate the public equity markets.
Transcripts
00:13 Dominic Hobson: Hello I’m Dominic Hobson, co-founder of the Future of Finance. My guest today is Alasdair Haynes, the founder and CEO of Aquis Exchange, which, despite being little more than ten years old, is now the seventh largest exchange in Europe, measured by turnover. A self-confessed disruptor, Alasdair learned how to innovate as CEO of Chi-X Europe, which was the first exchange to break the monopoly of the domestic national exchanges, and before that, as CEO of ITG International, where he was the first to introduce the concept of dark pools into Europe. Alasdair, thanks very much for taking the time to talk to the members of Future of Finance.
00:53 Alasdair Haynes: Not at all. It’s a great pleasure.
Question: What is the history of Aquis Exchange?
00:55 Dominic Hobson: Could we start at the beginning and give us a brief potted history of Aquis Exchange?
01:02 Alasdair Haynes: Yes, of course. I founded the business back in 2012 as a pan European equities exchange, basically centred around a subscription model. Ten years on, we’re Europe’s challenger exchange. We create better markets for a modern economy; we have market leading technology; we have innovative rules for trading; we offer primary listings; we offer secondary trading; and we licence globally our proprietary technology.
01:33 Dominic Hobson: You mentioned subscriptions there, and I know that you’re a big believer in subscriptions. I wonder (a) where that idea came from and (b) what you would say, and this is a personal feeling of mine, is that a lot of businesses want to be subscription based these days, partly because it guarantees a cash flow. So I wonder what you would say to those of your customers who might argue that subscriptions are good for you, but not necessarily good for them.
01:59 Alasdair Haynes: Well, I am a subscription junkie. You’re absolutely right. And in fact, if you look at the Fortune 500 over the last 20 years, 15-20 years, the fastest growing companies, the majority of them, have been subscription based. And subscriptions change human behaviour. We look at the way we shop today through things like Amazon Prime, we watch movies through Netflix, we have television through Sky. We can just go on and on. It’s a daily part of your life. And what amazed me is … I started this, and, you know, how did I create the idea? I was actually buying my son at the time, a phone in Vodafone in Tunbridge Wells, and he wanted the all-singing, all-dancing, latest iPhone, unlimited text downloads, et cetera. I thought, as a parent, that might not be a sensible thing for a twelve-year-old, because he probably downloads stuff his mother didn’t want him to see, and he would almost certainly not be doing homework and be talking about cricket or football or something. And I bought him a £9.99 Samsung with a fixed price and a fixed cost. A very grumpy twelve-year-old in the car on the way back. But the penny dropped. Absolutely truthfully, the penny dropped in that shop, which is `What had I been doing at Chi-X, which was a challenger exchange? And what were we doing? What was Vodafone doing?’ Well, actually, it’s the same thing. They manage networks and exchanges are utility businesses. A phone company is a utility business. The only thing that was different was the business model. And I looked and went back home and studied all sorts of academic papers on subscription pricing, completely blown away, because subscriptions do change. And maybe it’s my Scottish ancestry, and the fact that Scottish people are generally fairly careful with their money and the marginal cost of zero is incredibly attractive, but the underlying product, in every time subscriptions have been introduced, has actually increased multiple times. And we complain in the equities market about lack of liquidity. So the subscription was an obvious way, with a marginal cost of zero, of trying to increase liquidity and trading in markets. And that’s exactly what we’ve done. And ten years later here, as you kindly said earlier on, we’ve become the seventh largest exchange group, and we believe that our market share will continue to grow and those numbers will grow as people adapt to the subscription price. On that point about do I believe that customers don’t like it? Well, I don’t think that’s true at all. I think customers love it and I think it’s not just beneficial for the companies that produce, yes, it is good earnings because they’re consistent earnings, but you and I are old enough to remember the days of pre-competition in the mobile, in the phone industry. Today, I let my children be on a phone as long as they like because I paid the £19.99 or £29.99 or whatever it is a month. But in our day, my parents used to shout at me, get off the phone, you’ve been on it too long, or it’s not 06:00 and God help it if I’d actually had a friend abroad, because that means you couldn’t ever speak to them. So I think there are huge things that happen through competition, innovation and that subscription price that allow you the freedom when you buy things, shop, if you’re on the phone watching films or listening to music, all these things can change. And it should be the same for trading. We should have that ability to allow people to trade with that marginal cost of zero.
05:28 Dominic Hobson: You mentioned liquidity. You’d also touched earlier on how you organise your market and the trading on it. I noticed that you’d recently amended your rule around aggressive proprietary trading by non-client firms. Could you talk me through why you made that amendment and how it fits inside your concept of how a market should organise trading and how it should attract liquidity.
05:53 Alasdair Haynes: Well, the primary purpose when we set up Aquis was based on this subscription model. But what we did find back in 2015, was that there were certain types of trading that actually we thought were not beneficial to the market. And this was low latency arbitrage. So we brought in a rule that prohibited those principal traders, proprietary traders who were using, were not trading on behalf of clients. And that rule said that they could be members of the exchange, but they couldn’t cross the spread. In other words, they couldn’t aggress, they weren’t allowed to take liquidity that was already in the marketplace. They could only provide liquidity. Now, at that time, I thought this was something that totally differentiated us as we grew our business. But there is a point that you get to when we realised that when talking to our customers and our market share had sort of stopped growing at the rate that we wanted it to grow, and we started talking to customers saying, `Why are you not supplying liquidity and trading as much on our market?’ And they said, look, you are a lower toxic market. In other words, the prices on our market were moving, don’t move in the same way as other markets because of that rule, because of that arbitrage that doesn’t take place. And actually, that’s very good news if you are somebody who’s taking stock from our market. However, for those who supply it, others, they weren’t getting traded against. In other words, we didn’t have these arbitrageurs who will be able to take these prices. So what we decided to do, and we realised that getting business done quickly was more important than these people getting what I thought at the time was more important, a better price. And so what we did is we opened up that all traders now can aggressively trade. However, liquidity providers who were supplying huge liquidity to our market wanted that protection. So we gave them the opportunity, the choice between you can be a liquidity provider and not be aggressed against, or you can be a liquidity provider and have everybody trade with you. And that is unique. I think we’re the only exchange in the world that does that. Now we launched that actually this week, and we’ve already seen a significant difference in market share and the way things are trading now, it’s early stages, but we believe longer term this will significantly change the market share and the way that markets operate in Europe.
08:21 Dominic Hobson: Can we switch from the trading side to the operational side now? There is a move, we’re not quite ready to describe it as worldwide yet, but it’s likely to become global, to switch the settlement timetable to T+1, and indeed T+1, probably as a way station on the road to T+0, which in the world of blockchain is regarded as the starting point with this so called atomic settlement, where if you don’t deliver the securities and the cash simultaneously, the trade simply fails and dies if that doesn’t happen. I’m going to ask you a very complex sort of composite question here, which is one, are you confident that London in particular is making all the preparations it needs to move to settlement on T+1 successfully? Secondly, I wonder what your own views are on atomic settlement? And it strikes me that one of the disadvantages of atomic settlement is that you can’t or it’s more difficult to net the trades before they proceed to settlement. So what’s your view on how well prepared we are for T+1? And what are your broader views on the idea of atomic settlement, with particular reference to netting?
09:35 Alasdair Haynes: Well, look, I mean, there’s a government supported project out there to move this industry to T+1. And any move that reduces the time to settlement is a good move for the industry because ultimately it’s lowering the cost of capital, it’s making things more efficient. But in truth, if were to project ourselves into the future, no market is going to be T+1, it is going to be T+0. You’re going to have same day settlement because that massively reduces the risks. So whilst I’m supportive of any project that moves us in the right direction, at Aquis we’re looking far more forward than just what the next step is and actually looking to how do we get to T+0? And I say T+0 and not atomic settlement because I think you make a very, very valid point, which of course is with atomic settlement where you trade everything instantaneously, you are cutting out the opportunities of netting. And for people who want to do, and market makers who want to make, thousands of different trades, tens of thousands of trades in a day, it will become incredibly expensive if you can’t net those trades. So the practicalities of the market are such that actually atomic settlement would increase cost, not what its purpose was, is try to decrease cost. So the optimum here is to find a way of getting to T+), which will reduce the cost of capital for the marketplace as a whole. Reduce the costs but allow the market to operate efficiently. And I think that will happen through a combination of what you said of distributed ledger technology, with technologies that are being designed and worked on now, and things that we’re working with other people, third parties, and internally here on ways in which we can get a marketplace to get to that really important T+0 zero status. And it’s going to take years to get to T+1. This project was started a couple of years ago, and I think it will be, once that fundamental change to T+1 it’ll be far quicker to then move the market from T+1 to T+0, because many of the things they’re going to have to do for T+1 can actually be sped up in the second stage, which ultimately is where the market needs to go.
12:01 Dominic Hobson: I’m now going to rather clumsily jump back to the trading side, but a thought was prompted by what you were saying there about settlement. Back when were young, one of the drivers of securities lending and borrowing was, of course, trying to avoid settlement fails. But that securities financing market has long since been overtaken by trading activity. It’s people covering short positions which has become the main driver of how that market works. And it occurs to me, if you’re involved with relatively small and mid-cap equities, short selling, and therefore short covering, is going to be a very important source of liquidity in those markets. And I wonder how important you feel short selling is to the provision of liquidity to those small and mid-cap equity markets. We saw with CSDR [the Central Securities Depositories Regulation of the European Union (EU)] an attempt by European regulators to make that a little bit more difficult than it should be. I wonder what your views are on the value of short selling, the importance of short selling to small and mid- cap equities.
13:09 Alasdair Haynes: I think … I have a very controversial view here, which is, we run a primary market, the only other primary market to the London Stock Exchange for equities in the UK. And we have a set of rules. In our set of rules for what we call the Apex segment – that’s the equivalent, I think, of what the London Stock Exchange AIM market is – but in that segment, for us, we have a set of rules that ban short selling. Why? Well, in my old age, I’ve become quite interested in gardening. If you plant something and you grow something from seed, you have to nurture it. And where this country is so brilliant is, it is fantastic at early-stage capital, very early stage startup capital, where you’ve got SEIS [Seed Enterprise Investment Scheme] and EIS [Enterprise Investment Scheme], then you move on to scale up. And this is obviously a show where I can’t say actually what I truly feel, but we are truly rubbish as a country in scale up capital. We have tens of thousands of great entrepreneurs. They don’t get that ability to be able to scale their businesses up, and therefore they go to venture capital. And that venture capital eventually takes these companies and they sell them, and they use the stock exchange as an exit, and they tend to go off to, to take these companies off to Nasdaq or go off to North America. Now, why do I say this? And why is it relevant to short selling? Because at the early stages, this critically important part of scale-up capital, you have to nurture these businesses. Companies are like children. They start small, they grow and they mature. We educate children in different ways, from primary school, secondary school and university. And we need to have those same sort of sections and segments and schools for companies as they grow. So in the early stages of your sort of primary school and secondary school, we need to protect and we need to protect these companies, and we must allow them to grow. So, by banning short selling, and I’m not anti-short selling, I’ll come on to this, but by banning short selling for companies at this stage, what you’re doing is the same thing as stop pruning plants when they’re only a few months old, because you’ll kill them. We don’t want to kill these companies, we must protect them. If a hedge fund goes short of a good company for no reason of its own …. Let’s take the pandemic. There were many companies in the entertainment sector, the restaurant sector, all these things, good businesses that suffered temporarily. Now, in selling short, what happens is many of those share prices will collapse. The motivation of staff will go because their options will be underwater. The entrepreneur then either closes down and you lose a great entrepreneur who could have had a good business at the expense of the true shareholders who held the stock. The short sellers benefited, but they’re not helping the economy at this stage, because liquidity is one thing in a large cap stock, but actually the important thing in a small cap stock is allowing it to grow, to give them the capital and have price discovery. And this is a really important thing, because most people talk about the importance of liquidity on an exchange. With early-stage companies, it is the importance of having price discovery. In other words, what is the price, the value of the asset I have, having floated my business, that I can use in the form of taking another business or making an investment, or whatever it is? In other words, taking that asset and using it as a currency, you need price discovery for that. You will grow liquidity, because as companies grow, that liquidity becomes bigger. and bigger as more investors come in, your market cap grows. Now, at that point in time, if you’re getting to £800- 900 million, maybe a billion-pound, business, short selling is very beneficial because short selling adds extra liquidity. And at that point in time, you want more buyers and sellers of your shares to make your stock liquid. So it’s very, very different. It’s like trying to compare university, where you’re on your own, but under the guidance of a professor, to a secondary school where you are actually being taught and you are being protected. And I think it’s really, really important that we make certain that for our young companies in this country and all over Europe, that we give them the opportunity to grow by not having short selling at the earlier stages, but by introducing it at a later stage when it’s more appropriate for those companies.
17:41 Dominic Hobson: As you say, that is a controversial, somewhat surprising view. Must have made for some interesting conversations with some of your members.
17:50 Alasdair Haynes: Well, I probably don’t receive as many Christmas cards as I used to, but then as a disruptor and somebody who’s proud to disrupt, I think positive disruption is something that’s always attracted me throughout my entire 40-something year career in the City. It’s not about whether you’re making people happy. It’s about you creating a better marketplace? And what is critical and why I’m so excited about Aquis is that there is an opportunity here, because the country, post-pandemic, post-Brexit, definitely requires the economy to grow. And it doesn’t matter whether you’re a Conservative voter or a Labour voter, both have clear statements about economic growth as being the way that we’re going to get the country out of the mess that it’s in today. And economic growth can only happen if you can get small companies to grow, because that’s the heart of the economy. And you read in the newspapers all the time now about unicorns heading off to the United States. My belief is it’s too late. Of course, they’re going to go to the United States. That’s where the higher value is. What we have to do is replicate what’s happened in the United States. So our focus is on getting scale-up businesses to have scale-up capital for these growth companies and keeping these unicorns in the United Kingdom, or potential unicorns in the United Kingdom by getting them to go public at a much earlier stage than they do today. And that is really, really important, I believe, to helping this economy grow and getting proper tax receipts into the government’s coffers.
19:27 Dominic Hobson: As you mentioned, London is now operating in a post-Brexit environment. I wonder what problems Brexit created for a pan European exchange like Aquis. But I also wonder what opportunities it created. I touched myself earlier on European Union views on short selling, European Union views on settlement fails, for example. So what’s the balance of advantage and disadvantage for Aquis of Brexit?
19:56 Alasdair Haynes: Well, the disadvantages are easy, because we had to go to Europe in order to be able to operate across all your European clients who wish to trade either in Europe or in the UK, and vice versa, we had to have an operation in the UK. So we now have an office based in France, in Paris, regulated by the AMF [Autorité des marchés financiers] and the ACPR [Autorité de Contrôle Prudentiel et de Résolution], giving us and giving our clients the ability to trade any stock, anywhere to anybody at any time. And that is a sunk cost now. And you had to do that if you wanted to get through Brexit, because I think people have got to remember Brexit is a very political move if we look at the way that markets operate, and actually markets should be rather like sports, completely away from politics and not affected by politics, but tragically they are. But when you look at what happened in Brexit here, this country, geologically is next to Europe. It’s not going to move. People want to trade. If you trade the telecom sector, for example, and you happen to be an American investor, you look at the telecoms across the whole of Europe, you don’t divide it up into countries, you don’t divide it into a part of Europe, you’re looking it across Europe. So pan-European is essential. Now, the opportunities, of course, are you are going to see different regulation now in the UK over time, veering away from the common regulation that we had. And you now start getting competition in regulation. And as you know, the secondary objective which the government has set out is about competitiveness and growth. Now, competitiveness is different to competition, but competitiveness, by making this country more competitive, means in retaliation. Europe will be looking to do the same thing with its regulation. If we can get truly good, strong regulation across the whole of Europe, that is good for markets, and that is in some way a sort of effective competition amongst regulation around the world in order to make the United Kingdom more competitive. And that, I believe, is a very good place to be.
22:10 Dominic Hobson: You’ve been very articulate about the need to grow companies in the United Kingdom. You’ve also pointed out that unlike many of the enterprises which have entered the same space as you. you’re actually operating a primary market. At the risk of asking you to repeat yourself, I just wonder, what do you think you’re doing differently in the primary market? What’s the innovation you’ve brought to that?
22:36 Alasdair Haynes: Well, I think the way you’ve got to look at this is what happened in the United States. Why are the United States the best capital markets in the world? And it’s undeniable. That is a fact. And it’s two reasons. One is you’ve got competition amongst the national exchanges. Nasdaq was nothing before Microsoft really took off in the late ‘90s, and they’ve built a very competitive exchange. Competition creates innovation, and that innovation has made them successful. And the second point is that they actually get the public into public markets. The public are interested in trading in equities. They have access, easy access. That competition and that public in public markets makes them fundamentally different to what we do in the UK, which has had a monopolistic exchange and ironically doesn’t allow the public to go into most IPOs [Initial Public Offerings], and especially IPOs that are involved in growth stocks, which is the best performing asset class in the world over the last hundred years has been small cap, micro-cap growth and value funds. So not saying every part of a portfolio should be invested, but a part of people’s portfolios should be invested into small cap growth businesses, because long term, they are the performers. Now, in order to do that, you need to have the appropriate rules, the appropriate regulations. And what we’ve done over the last three years has actually been to set those rules to be proportionate and appropriate for the type of business. Many companies … I know when went public, we had a corporate governance code that made us the same as BP. We were 25 people. And BP has goodness knows how many people. That wasn’t proportionate and it wasn’t appropriate. So by changing these rules, we’re getting people to be able to come to a market just as I described those schools, an early stage market, which we call Access, that allows really small businesses that want to learn basically how to be a public company in the public markets. Now, they will have much lower liquidity, much smaller size in market cap. But from your primary school, you move into that secondary school and you’ve got all that experience, you have that knowledge, and then ultimately you grow from the secondary school into our main market, which is a direct competitor of the London Stock Exchange’s main market. Now, our focus today is on that scale-up capital piece, because that is the piece that I believe is so badly done in the United Kingdom today. There’s no choice for entrepreneurs. And having founded my own business here, I know how painful and difficult it was to raise money. In fact, one of the issues I’ve really got is entrepreneurs should be spending 90% of their time focused on what they’re good at, which is the business that they know and have started, and maybe 10% of their time focusing on financing. But actually, what happens today, entrepreneurs spend 90% of their time looking for money and about 10% of their time building the business. So businesses don’t grow as quickly as they should. Capital isn’t as available as easily as it should be. And that’s exactly what we want to change at Aquis … is make capital more available through the public markets. It benefits the company because they get the scale up capital to grow. It benefits the investors because instead of getting a de-equitisation, which we’ve seen for the last 30 years in this country, less and less equity out there, you’re now getting more and more equity back there and you’re allowing both the retail and the institutional investors to make significant money. Yes, at the expense of private equity and venture capital. But I believe that’s a good thing because that means people can create wealth and that is what we need, again to be able to do.
26:25 Dominic Hobson: At a very high level, what you’re talking about there really is a democratisation of the capital markets. You’ve just alluded to the fact that many of the returns from small and fast-growing companies have gone to private equity and venture capital firms, rather than being shared with the public at large. In a way, instead of getting democratisation, we’ve been getting privatisation of these returns. And one symptom of that is that stock exchanges, not just in London but all over the planet, have been losing IPOs. Companies haven’t wanted to go public because they’ve gone to private equity firms. And I guess you’ve probably begun to answer this question by saying that you need to tutor smaller companies to learn how to be public companies, and you need to reinvent the gains from being a public company as opposed to going private. But be more succinct with me. What should be done about exchange companies not wanting to go public, exchanges losing IPOs and this kind of privatisation?
27:31 Alasdair Haynes: I get it completely, because having gone public myself and having gone through that experience is painful and it’s time consuming. And there are rules and regulations that are not appropriate to companies that are growing at our size. Nothing’s changed there. There’s been no competition to the national exchange to go and make those rules and change those rules. By changing rules doesn’t mean about lowering standards. And I get this all the time, people saying, `Oh, Alasdair, your market must be a lower standard.’ It’s not if you use technology correctly. And I’ll give you an example, when I was young, and that was a very long time ago, when I started in the industry, over 40 years ago, I could read a prospectus at lunchtime. I’d probably then go round with my sort of small chequebook and my five pounds that I had and go to the local NatWest and go and buy some shares in the prospectus that I had read. Now, I’m in my 60s now, I can’t read a prospectus, not because of my age, over a weekend, but it’s 900 pages or 1,000 pages, of which 300 will be risk disclosure statements declaring that the chief executive might fall off their bicycle on the way to the office. Because the level of risk that you have to disclose is so low that everything’s disclosed. As a result, nobody reads it. It’s a huge cost because lawyers have to write these things. You have the same thing with the accounting standards and everything else. So what we’ve done is we’ve templated it. If you can’t describe your business in a few pages, you’re not going to come and be quoted on the Aquis Exchange. If you have more than ten risks, we don’t want to know about it, because actually, what are the ten key risks that you have in your business today? Because that’s what investors want to know. Do you have to change to be IFRS [International Financial Reporting Standards] as an accounting standard, which can cost you 100,000s of pounds, hundreds of thousands of pounds, to get accountants to do that? No, you don’t. GAAP [Generally Accepted Accounting Principles], is fully acceptable. Investors will invest in things that have GAAP. Yes, you’ve got to be transparent. Yes, you’ve got to reach high standards, but the standards don’t lower, but the process is changed. It’s templated, it uses technology, it’s quicker, it’s faster, and therefore it’s cheaper. Therefore, we believe that we can get tens of thousands of these entrepreneurs, many of them, to come and get quoted at the earlier stages as an alternative way of financing this scale-up capital. And when people turn around and say, this country doesn’t have the appetite for risk, that’s rubbish, too, because there are five million people in this country who today have some form of Bitcoin or Ethereum or some cryptocurrency wallet. So if you’re telling me that they’re not prepared to take risks, there’s five million people who do today. And when you say you don’t have enough cash out there, there’s £1.8 trillion of cash sitting in banks today for retail banks. So, yes, there’s cash for retail to invest. And that cash is being eroded today at 6.7%, the rate of inflation, instead of being properly invested into, partly into small cap and growth companies, but also should be invested in many other assets out there which have returns. And this is a point that I think is really, really important. Not only the retail need to do that, but the retail’s wholesaler, which is the pension fund industry, needs to do that. 20 something years ago, pensions had 40% of their assets in UK stocks. Today, that number is something between 2% and 4%. So the problem that we’ve got is equities are not sexy. And in short, we have to make the equities industry sexy again. And the way you do that is by some of the things you talked about earlier, digitalisation, potentially tokenisation, taxation changes incentivise people to come in here and use the equity market, one, to create wealth, two, to help finance industry, and three, to allow the pensions to have your pension scheme. And I mean, you’ve got this thing, the Mansion House Compact, where ten houses, ten pension fund asset managers have agreed that by 2030, they will have 5% of their assets in unlisted securities. Now, that brings a whole other can of worms in here, which is the definition of unlisted securities, because one of the things that I think is so bad about our industry is we’ve made the vocabulary incredibly complex. And I just want to make one point for all your listeners here, is that a listed security is a stock or share that has actually been through the Listings Authority, which, surprisingly enough, is not the London Stock Exchange, it is the regulator, the Financial Conduct Authority (FCA). Any other stock that has not got through, so any stock on AIM, any stock on the Aquis Access or Apex segments, are done through an admissions document and they’re not operated on a listing exchange, therefore they’re actually quoted companies. And the bad way, in what the media often refer to these companies as unlisted, which could mean private, it can mean quoted, it could mean all sorts of different things, but unlisted almost sounds like a bad word and people should start using … We have quoted companies. That means it’s gone through a very detailed regulatory process. It’s on a recognised investment exchange, or it’s on a subsidiary of a recognised investment exchange, which is what AIM and the Aquis Stock Exchange does and the terminology quite often puts people off saying, `Oh, I don’t want to trade in an unlisted security.’ It’s like, I don’t want to trade in an unregulated market. Well, we’ve got to get this terminology right, because if we don’t, people are not understanding what they’re doing and what the risks are. And this is the responsibility now, I think, of government and policymakers and in particular the regulator, to make absolutely certain that people understand what they’re investing in. And that actually unlisted is not necessarily a dangerous and high-risk investment. Many, many of the stocks that I would describe on the Aquis Stock Exchange are not what I would say are high risk investments. There are risks, but not high risk. Nothing the same as trading in Bitcoin or other certain sorts of tokenized assets.
34:14 Dominic Hobson: Just very quickly, do you think that 5% pledge by those ten asset managers, institutional asset managers, is going to happen? They are meant to put in 5% by 2030, will it happen?
34:27 Alasdair Haynes: I think, in truth, the answer is no. I would like it to happen. It’s the right thing to do. I think it’s very easy to make a promise for something in seven years’ time. I’ve never seen somebody write a business plan, and I’ve never seen a business plan that’s accurate seven years forward from now. So signing up to something which says, by the way, I might do something by the year 2030 is nice words. Probably not going to happen. What I hope will happen is that people will start to focus on this and realise the definition of things like unlisted securities and what they mean and start getting the pension funds to realise that investing infrastructure projects, in bonds, in all sorts of other things, or convertible and quoted securities on markets like us, are really, really good alpha, as in outperformance stocks. And I think the great example there is watching Australia and what they’ve done with the superannuation schemes, and most of those are invested in what we would describe as unlisted securities, but actually in things like private infrastructure projects and quoted companies.
35:38 Dominic Hobson: On the retail side, getting retail investors involved in the primary market again, as you alluded to earlier. You mentioned, of course, that the appetite for risk is most evident in the fact people are investing in Bitcoin and Ether, but they can do that through an app on their telephone. It’s very easy, it’s very accessible. Is that what needs to happen in the equity market as well?
35:58 Alasdair Haynes: I’m so glad, Dominic, you asked that question, because my belief was when we started and I founded this business, was that the way you’ve got the subscription model, everybody … I talked to my children, they were in their ‘20s, all their friends, they all trade all sorts of asset classes. It’s all done through their iPhone or smartphone. If we can’t do that as an exchange in the future, we’ve got something hopelessly wrong. The technology is here today. So, yes, you’ve got to be able to simulate the success story of the crypto world by making it a regulated entity, digitalising the process in such a way that we are making equities sexy again. And that’s the way you do this. In other words, making it simple. Let’s cut out all this difficult terminology. For example, my son recently came to me and talked about pensions. When I said to him about, I think you’re starting work now. You need to think about your pension. He said, pensions are for old people, dad. People like you. And I said, okay, think about this, Alexander. If I gave you a tax saving, an advantage, so I give you basically, like, 30% free, and if you saved regularly, and it’s an investment plan, and therefore, at the end of the day, you’re creating wealth and something for you to go and leverage, maybe in the future to buy a house, et cetera. He bit my hand off and said, oh, I’d have one of those. I said, yes, that’s called a defined contribution pension. So we call these things pensions, but actually, what are they? There are tax incentivised investment plans, and everybody should do it. It’s an absolute no brainer. But we don’t sell them correctly, we don’t promote them correctly, in my view, and therefore, we need to do something about that. So I’ve been a massive advocate with government and written to all the policymakers about how we need to change ISAs [Individual Savings Accounts], how we need to change the way we promote pensions. For example, today in ISAs, 65% of all ISAs in this country are held in cash. Okay? You’re getting an interest rate. That interest rate is not going to match inflation. So you’re basically saying 65% of all the investments made on behalf of the British taxpayer, who has sponsored, in effect, the tax free environment that the ISA is in, and then a large percentage of the rest is actually in ETFs, the exchange traded funds or products for international stocks. So, again, the British taxpayer is supporting the investment of foreign companies and not supporting the UK businesses. My view is that we should reduce the amount of cash, not wipe it out completely available that you can hold in an ISA, and you should reduce the amount of foreign investment and the primary focus should be on UK quoted and listed companies, because then the British taxpayer is incentivised to be able to support the British economy, get the returns that are available by the many thousands of great businesses that we have here. And that way you’ve got a pool of funds to allow these people to go public at an earlier stage. Win win all around.
39:11 Dominic Hobson: Are there other things that the government should do and the regulators should do here? You mentioned earlier these thousand-page prospectuses, which are ultimately a product of law and regulation, equity still has an unfavourable tax treatment by comparison with debt. Are there other obvious moves which the government could make?
39:31 Alasdair Haynes: You’ve hit the most obvious one which is if you’re going to trade an asset class that has a disadvantage because of what happened with the taxation of dividends, and yet you can still allow coupons of debt to be tax free, then you’re basically saying that this is a lower-class asset. There’s no government today, either this one or the future one, or if there’s a change of government next year, where the word tax is going to be helpful. I mean, anything you turn around and say you need to cut taxes here, that’s not going to happen in the near term. So we’ve got to think about ways of which you can actually increase tax receipts, but incentivise people to invest. And one of the ways we use capital gains tax on regulated growth markets. That’s AIM and us. And on the regulated growth markets, if you are looking at a primary or secondary, the retail element of that, I believe should be capital gains tax free. Now, if you hold it in an ISA, it will be, but it ought to be. Now, why is that a winner? Because I know that when we floated, if 10% of our money that we raised, I think we raised about £12-13 million pounds during our float of new money – there were sellers of stock and everything else, but I think about £12 million of new money. If 10% of that had been done by the retail and the retail had been allowed in, you’re actually giving away £1.2 million pounds to the retail investor. The company grows. In this case we pay corporation tax. We now have PAYE [Pay As You Earn]. We used to be 20 staff; we’ve now got 80 something staff. The government is benefiting from all the upside of the growth of the company and is giving away a very, very small amount on capital gains. So it’s a win to the government, it’s a win to the company, and it is a win to the investor. So I think it’s innovative tax ideas like that that should be pushed through. Now, whether that ever happens, I don’t know. But I’m really hopeful that in the Autumn Statement, we will see the pressure that’s on ISAs, that we’ll start seeing either an extension for EIS and SEIS, or we’ll see some benefits in ISAs that will start to make equities to become more attractive.
41:44 Dominic Hobson: Let me now go back to your business. You’ve got another business division, which is data. Tell us what you’re selling, how valuable it is for you and for the buyers.
41:56 Alasdair Haynes: Well, data is very valuable to all exchanges, but unlike other exchanges, we don’t charge our members for data, so data is free to them. But what we do do is we sell the prices, the bids and offers, the trades, the pre trade, the post trade, et cetera, all the prices to data vendors. The data vendors then distribute those to clients. And therefore you can see the Aquis, not only the Aquis stock exchange stocks that are there, but actually the pan Europeans, two and a half thousand stocks we trade in 16-17 different markets. So all that data is available now. Of course, one of the most exciting things that we see is the consolidated tape. It always was somewhat bizarre in Europe that somebody who sits in France actually can’t see any of the prices that go on in Germany or in, I don’t know, Portugal or wherever, and there’s no single tape for that. And that is predominantly done because the stock exchanges, the national stock exchanges, have made a lot of money and they protect themselves by what I think is a very, very high cost for their data. Now, again, the consolidated tape is going to happen. That has now been passed through the Trilogue [the term for tripartite meetings of the EU Parliament, Commission and Council]; that is the member states, the politicians and the Commission itself in Europe, and we’re going to have one in the UK as well. So it’s not a question of if we have a consolidated tape, it’s a matter of when we get the consolidated tape. So data becomes very interesting from an Aquis perspective, because we are disproportionately advantaged. Because we don’t charge members today, we will get a revenue stream out of data. But what you can tell once again, by looking across the Atlantic and looking at America is their cost of data over there is hugely different, hugely cheaper than what it is in Europe. And that is what we need to achieve. We need to get this frictional cost down to a level that can promote more business here and actually make the markets more efficient. So you can see prices anywhere across Europe at any time, at a reasonable price. And the point here is about reasonable price. Today, I don’t believe that price is reasonable. And you can look up … Anybody who wants to look up, go into the accounts of the London Stock Exchange, Euronext, Deutsche Börse or whoever, and you can see how much that data services and data, how much they make. In fact, David Schwimmer at the London Stock Exchange loved data so much, they went and bought Refinitiv, in effect turning themselves into a huge data company. So data is really important. And what we need to see the consolidated tape will be the effect of bringing competition into that data world.
44:32 Dominic Hobson: I’ve spent enough time with asset managers to know how objectionable they find it that the exchanges are profiting so heavily from the data which they actually create. But that’s probably a story for another day. Well, you can have go. I’m sure you’ve got a view on it.
44:48 Alasdair Haynes: I have a view on most things, Dominic, you know that.
44:53 Dominic Hobson: You’ve got another business division, which is technology. You mentioned right at the outset, you’re selling your technology. Among the people you’ve sold it to are a A2X in South Africa and Archax here in London. How important is the business to you? What are you selling to them, and what do these buyers like about your technology compared to what they could buy from other exchanges?
45:13 Alasdair Haynes: Well, I think technology is the core of our business here. Of all the divisions we have, they all rely on the central technology that we operate, and we now license that right the way around the world. And we literally have clients in every major continent. What makes it different? Several things. It’s about efficiency, it’s about the scalability, and more recently, it’s actually about the cloud. And the cloud is really important. Why? Well, let’s just look at some of the economics here. The analogy I like using here is the cars industry, which is 93% of the time anybody who owns a car leaves it in the garage or leaves it on the pavement outside, they don’t drive it. So if I turn around to you and said, you know what, for 7%, that’s all you have to pay me, you can have the same car, you can use it whenever you like, but for 7% of the cost of that car, I will sell you the same car. You’d bite my hand off. You’d literally bite my hand off. Everybody would. Now, it’s the same thing because most exchanges today – although some of this is changing, we’ll come on to that in a second – most exchanges today do not operate 24/7 businesses. So, in effect, you are paying for an expensive data centre with all the people who are there to operate it right the way around, maybe in three different centres around the world, Asia, Europe and in America, and you’re having to pay for that. The economics changes if you can get exchange grade technology into the cloud, and that is exactly what we’ve done. I won’t go into the details, but we work very closely with the Singapore Exchange and with Amazon Web Services, literally with the developers within Amazon in order to solve some of the problems which prevented exchange grade – there’s lots of businesses in the cloud, but exchange grade, which is consistency of speed, consistency of that latency itself – to be able to operate in the Cloud. Well, we’ve done that. We conquered that problem. It did take 18 months to two years to do, but we conquered it and we are the world’s first here. And it’s that product that has really, really changed us as a way of the technology that we sell. So the difference is two, three years ago were selling to people like, as you mentioned, A2X, high grade data centre, beta technology. Today we’re talking to national exchanges. We actually even have a national bank. We’re down to the last two. We’ve beaten our major competitor on the last two or three contracts, which is obviously a very well-known North American exchange and this is pretty exciting business for us and we’ve spent quite a lot of time, effort and money investing in that. So yes, we are an exchange, but you’ve got to also ask, `What is an exchange?’ And an exchange has fundamentally to have very strong, comprehensive, cutting edge technology and that’s what we’ve built. Most exchanges today operate on a technology that was built 20 years ago. We are operating in a real modern, next generation type environment and that’s what excites the hell out of me.
48:33 Dominic Hobson: One of your technology buyers is Archax. Now Archax are positioning themselves to take advantage of what they see as a likely rapid growth in tokenisation of both of funds and of securities. And here at Future of Finance we do track what’s going on in the tokenisation markets and we see the vast majority of issues which have taken place are either of an experimental nature or, and it’s usually and/or, asset backed is what I call them. In other words, they’re tokenising an asset which continues to exist in its conventional form, whether that’s a bond or an equity or a commodity of some sort. But the long-term opportunity, it’s becoming increasingly apparent here, lies in creating purely tokenised assets. The digital asset doesn’t exist in any other form except its digital form. It sits on a blockchain, usually blockchain platform. It’s not tied back to a real world asset and to all the real world service providers which add cost to the servicing of that asset. Now I wonder, as an exchange which is innovative, which is disruptive, which has an interest in technology and an interest in data, on the face of it, and you’re in the Cloud, you have all the pieces in place to yourselves, profit from tokenisation. And I wonder what your views, on, what your views on tokenisation are and also what your customers’ views on tokenisation are. Do you think this is just an experiment? Are we on a transition to it is already a failure? Is it the future?
50:10 Alasdair Haynes: No, I think the answer is tokenisation and digitalisation are the way forward here. I am not an expert, and actually don’t want to be an expert in exactly how that is going to operate. What I found, and in the sort of books that I’ve read, in the Gold Rush in America, the people who made the most money sold the shovels. I don’t know who’s going to be successful and which token, which style of token, which cryptocurrency, whatever it is, I actually genuinely don’t know. And I’m not certain anybody does know who’s going to be successful, but I do know I’ve got the product to sell them, to be able to trade it, to be able to do it in the most effective way and be able to ultimately settle in the way that markets need to operate. So we’ve really positioned ourselves as the shovel seller within the industry. Personally, I think the tokens that are backed by assets will be the way forward because you are taking a traditional market that takes … Let’s face it, what happens today when you go and buy a share? The person on the street either uses an app or even calls their broker. The broker then actually sends an order to a market maker. The market maker contacts the exchange. The exchange then prints that data via a data vendor. Then it goes down to a central counterparty in order to actually make certain that the settlement takes place. And then it goes to a custodian, and then the custodian sends it off to a registrar. Each one of those people wants to make a profit, or each one of those companies and intermediaries wants to make a profit. It is madness. There is no way that if you created a market today you would do anything like that. So when we talk about tokenisation and digitalisation of the process, why has crypto and tokens worked so far? It’s because they’ve simplified a complex process. That’s the way forward. I don’t think I can answer as to which tokens or which style will necessarily succeed, but the technology and the efficiency in the market definitely will change in the future, because you can’t have eight, nine, ten intermediaries on every single trade that takes place without it being hugely costly and unable to grow. And we need to make these markets cheaper and grow.
52:32 Dominic Hobson: Alasdair, I promise this is my last question, and it’s a slightly unfair one, but in a way, I’m asking you to summarise everything that you’ve said already. If I asked you what your vision of the perfect equity market would be, what would it actually look like?
52:46 Alasdair Haynes: The simple answer would turn around, of course, and say, Aquis. But we’re in the process of creating what I think it should look like, which is, of course, one, you’ve got to have competition, and competition is a very healthy thing if you want things to happen quickly. If I start eating somebody else’s lunch, my God, do they start changing quickly. If we write lots of academic papers, and I’m absolutely a supporter of academic papers, but if you write lots of papers, things don’t necessarily move quickly. So competition, getting the public involved in public markets, simplifying the process, making it easy for people and for companies to raise capital and make quite certain that the technology is moving in the direction of the digitalisation that we see in the crypto world, because it’s not the asset, I think, in the crypto world that’s attractive, it’s the technology that sits behind it is the thing that’s attractive. And I think the combination we’re working on, every single one of these within Aquis, I think that means that the future is incredibly exciting.
53:47 Dominic Hobson: Alasdair Haynes, thank you very much for taking time to share your views – and what views they were – with the members of Future of Finance. Thank you very much.
53:56 Alasdair Haynes: Not at all. Thanks, Dominic. Thank you very much.
