The Future of Capital Markets

Hello from Origin,

Last night I was in Luxembourg celebrating the 90th anniversary of the Luxembourg Stock Exchange, the ‘Bourse de Luxembourg’.

I was kindly invited to give a speech, titled The Future of the Capital Markets, alongside three other experts, who each looked at China, A.I., and Sustainability.

On the blog this week, I thought I’d publish an amended version of my speech that sets out my vision for the future of capital markets.

Please do have a read and I’d love to know any thoughts you might have on what I had to say.

All the best,


The Future of Capital Markets

(Speech delivered at the 90th anniversary of the Luxembourg Stock Exchange)

My task tonight is to paint you a picture of the capital markets 10 years from now. Of course, the temptation is to be bold, provocative, perhaps even irreverent. I mean, I am a millennial after all.

I could tell you that investment banks, stock exchanges, and clearing systems will all disappear, and that our children will be issuing bitcoin denominated bonds on the ethereum blockchain, and they’ll do it all on a Macbook while working remotely at a co-working space in Bali.

But, before we explore that techno-utopian future, we first need to take a brief look at history to explain how we arrived at the capital markets of today.

The History of Capital Markets

The concept of debt is as old as time. Five thousand years ago, humanity’s first written texts were not love letters, or religious sermons, but loans of barley, written on stone tablets in ancient Sumeria. In fact, the Sumerian financial system developed so quickly, there was already evidence of banks and limited liability companies.

The 13th century merchants of Venice took the next step forward. To help finance the risky business of long-distance shipping, the government issued bonds known as Prestiti, perpetual notes carrying a 5% coupon. Already in those days they were registered rather than bearer notes, with the government maintaining the central register of holders.

In order to facilitate all this commerce, a new player emerged – the merchant banker. The business of banking spread around Italy and then Europe, establishing some of the most famous early banking families, including of course, the Medicis.

It’s the Dutch who lay claim to the most famous development in capital markets history. Looking to capture the lucrative spice trade, they set up a corporation combining multiple ships into a single company. In order to raise enough capital for the venture, they issued shares to the public, conducting the world’s first IPO in 1602.

The Dutch East India Company grew to a fleet of nearly 5,000 ships, a standing army, and its own currency. Investors were rewarded handsomely, with an average dividend yield of roughly eighteen percent, and a market cap in today’s money of a staggering $7.4 trillion dollars. Importantly, the shares were tradeable, kicking off an active secondary market. The modern equity market was born.

Over the next 350 years the capital markets coalesced into the system we know today. The Rothschilds in Europe and Jay Cooke in America established the first modern investment banks, tapping into the great business of helping governments raise money for war. The second industrial revolution provided a steady stream of new clients – industrialists raising capital for railroads and factories across the US and Europe. Stock exchanges opened in major cities worldwide, including of course, right here in Luxembourg.

Today, we may have a few more gadgets at our disposal. However, the structure of our capital markets remains the same. Indeed most of us have spent our careers at institutions that were spawned during that golden age of industrialisation.

So what about the future? How will the markets look in ten years time?

The Future of Front Office

Or, to pose the question everyone in this room is actually asking, will technology disintermediate investment banks? Again, I believe the answer lies in history.

When the internet first arrived, experts predicted the disintermediation of a whole host of industries. However, one study shows that middlemen have actually grown in importance to the US economy, with their contribution to GDP growing from 25% to 33% from 1999 to 2010.

What happened?

When eBay first launched, anyone with a computer and an internet connection could sell stuff online, “democratising” e-commerce. Today, over half of eBay’s volume passes through 4% of its users, power-sellers who have no inventory of their own.

LinkedIn’s journey is similar. Far from killing the professional recruiter, they contribute the largest portion of LinkedIn’s revenue. Social media started as a place for us to share pictures of our dogs. Now it’s increasingly dominated by professional “influencers,” who’ve made full time careers from producing content.

If we look closer to home at the world of fintech, P2P platforms such as Lending Club and Funding Circle have moved away from trying to source capital from individuals, and are now almost entirely funded by professional investors.

What’s going on?

Technology is very good at reducing operational costs. Information now travels at the speed of light and manual tasks can be automated. But, technology is reducing those costs for everyone, including the experts. So as the processing function becomes commoditized, the value of expertise and advice, actually increases.

This is happening in the capital markets already. Technology has transformed “process-heavy” activities like trading. In the past seventeen years, Goldman Sachs has reportedly gone from employing 600 cash equity traders to 2.

At the same time, the business of boutique advisory shops are booming. In 1995, bulge bracket banks had over 75% market share of M&A revenues. Today, they have retreated, and boutiques earn the majority of fees.

Crucially, clients agree. In a survey of issuers we conducted over the past few weeks, over two-thirds valued the unique trade ideas they get from dealers, and over 85% valued a dealer’s ability to place paper with investors. Those deals are closed because of advice, given not just to the issuer but to investors as well.  Technology is helping information flow, but the value of advice is increasing.

The Future of the Back Office

Ok, but what about Blockchain? I could spend the rest of the evening trying to explain how it works, but there are drinks to be and it’s not my style to delay a party. I am a millennial after all.

There are only three things that you should remember about blockchain:

1. It is a database, but there is no central authority, so it’s maintained by everyone.

2. It holds a record of everything that’s happened since it was created.

3. Because of number 1 and number 2, it’s pretty slow.

So what is it useful for? Blockchain is useful when there’s no trust in authorities. If I want to pay you digitally without alerting the regulator, then a cryptocurrency that sits on a blockchain is a clever way of doing it. But if there is trust in a central authority, its usefulness diminishes.

Even in the clandestine crypto-world, third parties are now popping up. In response to recent thefts and hacks, companies have cropped up offering “safe storage” for cryptocurrencies. Xapo for example, has taken over an underground bunker in the Swiss mountains, providing private bank levels of security for their customers to physically store their crypto currencies. So much for decentralised.

I’m not saying that blockchain won’t evolve, or that it won’t have an influence on the technology we use. Every computer scientist knows that databases have gone through numerous iterations over the past 60 years. Exchanges, clearing houses, and custodians may evolve again, and incorporate distributed ledgers into their systems. But the institutions themselves are here to stay.

What does the future look like? 

So will anything change? Of course it will but it’s important to remember what technology can do, and what it cannot do. Technology can increase the flow of information and it can reduce operational costs. But it will not eliminate intermediaries. The value of their advice actually increases as the world becomes more connected.

As processing becomes unbundled from advice, we will see the rise of boutiques continue. Intermediaries will focus on a handful of core competencies and will stop trying to be everything to everyone. They will become smaller, more efficient, and there will be more of them. Origination and trading platforms give them global reach, connecting them to market participants around the world. Cross-border activity will actually increase. We might even spend less on lawyers, though I wouldn’t hold your breath.

However, the fundamental structure of our markets will remain.

Every time there’s a new technology, it’s easy to dream of change. But while dreaming, don’t forget the wisest investment advice I’ve ever heard:

The four most expensive words in the English language are, “this time it’s different”.

The capital markets look like this because they were created by humans, with all our quirks and foibles. We value trusted advisors. Central authorities give us structure, order, and comfort.

Technology will obviously change the way we work. But finance has always been, and will always be, a human business.