London Stock Market: The Singularity Arrives
Microsoft's stake in the LSE just might be the biggest news of the year
I have long wondered why the tech giants don’t just swallow global finance whole. They have, after all, unrivalled skills at harvesting, assessing and understanding information and most of the infrastructures which finance uses are probably generations behind what the tech giants use.
Maybe that changed yesterday, with the news that Microsoft has bought a 4% stake in the London Stock Exchange Group for £1.5bn. Now, this might be just the LSE bringing in the partner it needs to bring Refinitiv up to speed, after the LSE bought the would-be Bloomberg-killer for $27bn last year. Certainly that’s what LSE ceo David Schwimmer is saying, and the deal comes with a 10yr contract to move the LSE to Microsoft’s Azure cloud technology.
But if you listen to what Microsoft ceo Satya Nadella is saying, the ambition seems much greater than that: ‘Advances in the cloud and AI will fundamentally transform how financial institutions research, interact and transact across asset classes, and adapt to changing market conditions.’
That sounds as if Microsoft is genuinely going for it. If so, this could be the most important news of the year. An industry which still for most purposes basically runs on excel, and in some markets (trade finance, I’m looking at you) barely that, may be about to bump into an industry Singularity.
(Dave: “OK, I need to get that oil cargo unloaded at BP’s Venice terminal.” Hal: “I’m sorry Dave, I’m afraid I can’t do that.”)
The immediate commentary has been muted lament of another British fortress being stormed by foreigners, with a dash of tech-phobia thrown in. But this might overlook its significance, for any tech re-invention of equity markets comes at a very opportune moment. If successful, it could be an important motor helping deliver not just Britain’s economy, but the wider global economy, from the disastrous legacy of post-2008 economic and financial ‘policy’.
The starting point is to understand just what the developed world’s policy of zero or near-zero interest rates combined with quantitative easing did to financial markets. Equity markets in particular. In sentimental legend, stockmarkets are there to raise capital for productive purposes - ie, to allocate your savings to best advantage. But when interest rates are zero, and the central bank is spraying money about to its favoured counterparties, who needs a market to do that?
In recent years, the function of stockmarkets in developed countries has been mainly to provide lucrative exit-strategies for private equity firms. Those PE firms were able to borrow money at artificially low rates, using it buy or create assets to be subsequently floated on stockmarkets artificially inflated by that same monetary policy. On this reading, equity markets were little more than one end in a stitch-up most of us would regard as corrupt.
Stockmarkets - if they’re just accomplices to the central bank/private equity conspiracy, who needs ‘em?
Add to that the perverse rule under which regulatory costs of financial services rises in direct proportion to their redundancy, and you have a profoundly discouraging picture.
And sure enough London’s stockmarkets have stagnated for years. If you’d have invested £100 in the FTSE 100 on Jan 1, 2014, your position today, before trading and holding costs, would be worth about £111. Actually, the trading & holding costs would almost certainly have gobble more than the notional £11 gain.
As for capital raising: in 2021, the LSE-listed companies used the market to raise £16.8bn in IPOs, which was the largest amount raised since 2007. Let’s put that £16.8bn in context. The British economy is around £2.45tr, with gross investment spending of around £413bn. During 2021, Bank of England’s reserve assets rose by £197bn, of which term funding for banks rose by £142bn, with loans for asset purchases rising by £150bn. In response, banks made mortgage approvals of £91.7bn, with total mortgage debt outstanding rising £66bn.
And the LSE congratulated itself on raising £16.8bn. Loose change. As far as allocating capital for the British economy is concerned, the LSE is certainly not functional, and barely even decorative.
So who needs ‘em? The answer is that in a world in which money/capital is basically free if you have the right connections, they’re not really needed. Why bother with efficient or even rational capital allocation (think WeWork) when in the end, the capital’s coming from the central bank at a negligible fee.
The game changes dramatically, however, now that the era of zero interest rates/QE is over. In a world of constrained savings, allocating capital becomes absolutely crucial if economies are to grow, and people to thrive. For economics in this world, efficiently functioning equity markets become a make-or-break issue. This is particularly true for the UK, with its worryingly low level of saving, and its answeringly low level of investment. If you’re investing only weakly, every invested penny needs to run for its life.
The UK had paid, is paying, and will pay, a very heavy price for having a comatose equity market. If the economy is to break out of its long-term torpor, active and effective asset allocation is an absolute necessity.
This is the new context in which Microsoft is buying into the LSE, with an eye to bringing its various technologies to work on the problem.
If Microsoft eats the London Stock Exchange, and in doing so re-invents it and revivifies it, it is doing Britain a favour. Indeed, to the extent that Britain’s redundant equity market reflects the global consequences of zero interest rates/quantitative easing, it will be doing the world a favour. So fingers crossed.