Why did the Stock Market take all the power? The CEO of Euronext answers

The stock market is the price people are willing to pay to be there in the future, not for having been there in the past. When Christopher Columbus discovered America, he didn't know how long the voyage would take, and if he had told someone the duration of the voyage, he wouldn't have found a sponsor. Real life is: 'I have a conviction, I've seen things the rest of the world hasn't seen. I think I'm going to make it. Give me resources because I propose you become rich, because you will share the co-ownership of the success when it succeeds.' That's what the stock market is. It's for the ambitious.

Hello.

Do you allow me to take a bit of a long perspective? I have only one hobby. I read a history book a week, and I find that the historical perspective helps a lot to understand, sometimes even poetically, the world we live in, which did not happen suddenly by chance. In fact, markets are something that was invented probably 5,000 or 6,000 years ago with the first agricultural markets. When you were 6,000 years ago in your mountains raising three goats and perhaps already the first fine wines, and you wanted to sell a goat to buy tools, you had two solutions. Either you went to see your neighbor to exchange a goat for a bronze tool, or you waited for the day after the full moon and then went down to the valley to meet all the people who came the day after the full moon to sell their goats and others to buy goats. And this idea that the probability of finding more people interested in buying your goat and exchanging it at the right price is better than if you are in a bilateral transaction stuck with your neighbor's preferences and constraints. It's something that established itself quite naturally. So money is better than barter, but above all, the concentration in one place of all those who are desperate to sell their goats and the concentration in one place of all those who are desperate to buy goats. That is to say, this idea that we need to concentrate in one place all those who want to sell and all those who want to buy to ensure that in the end, the buyer doesn't regret having paid too much because they found someone desperate to sell at the lowest price, and the seller doesn't regret not having sold high enough because they found the one who could pay the most. And that's how agricultural fairs and agricultural markets—not really fairs, it's more the Middle Ages—became places where prices were naturally formed, or at least initially barter values, since there wasn't necessarily money at first, but the idea that everyone needed to be concentrated, and also the idea that if someone went to the next valley to try to sell their goats, they wouldn't get the best price, and there was real value to concentration. To speak tangibly, it's Mediterranean markets. When you go to the souks or Arab cities around the Mediterranean, south of the Mediterranean, there are often naive looks from some tourists who say, 'Why are all the carpet merchants in the same street, all the spice merchants in the same street, when they are in fierce competition?' Well, it's because the disadvantage of fierce competition is largely compensated by the concentration of buyers, and experience has shown that the one who sells his carpet alone among the spices has fewer customers to buy his carpets than the one who sells his carpets in the carpet street, and the one who tries to sell spices in the carpet street has fewer customers than the one who sells spices among other spice sellers. So the concentration of sellers brings a concentration of buyers. And the stock market is primarily that. It's a place where we got used to concentrating sellers and concentrating buyers to ensure that the exchange ratio first, and then the price, is the best.

The second important historical moment, which is another function of the stock market besides creating prices that I just described at length, I apologize, is what happened at the end of the Renaissance, at the beginning of the 16th and 17th centuries, with the beginning of colonial expansion. The first great discoveries were made with sponsors who were the monarchs. It was the monarchs who financed the crews, the armament of the ships, and who gave counterparts to the discoverer who brought a bit of sovereignty over new territories. These are the famous concessions that Christopher Columbus negotiated with the Spanish monarch in exchange for these efforts. And then quite quickly, it appeared that the monarchs were no longer able to finance these great discoveries, and that there was a form of commercial return to these discoveries that could justify a form of investment and considerable risk-taking. And so in the 16th and 17th centuries, especially in the 17th century, the idea emerged among a certain number of merchant communities that we could get together to share the risk and therefore the investment, but also the profit that a voyage of a ship could represent—from La Rochelle to Quebec to seek furs, from Lisbon to seek precious wood in Brazil, from Seville to seek precious products in Central America. And there, people decided to say, what we're going to do is share the risk a bit like co-owners, simply because we don't all have the same appetite for risk, there's uncertainty about whether the boat will sink on the way or on the return, we need to be able to exchange or sell our share of the risk as the risk increases or decreases in the project. And so we'll decide that it takes 100 to finance the boat and the crew. We'll divide it into 10. Each puts 10 in the pot and represents their share, their tenth in the business with a title. And this title, however, will be accessible, and people will enter and exit, substituting for each other, because this representation of the tenth of the risk of the project will be accessible, and what was worth 10 at the start will be worth less than 10 if the boat is in difficulty or takes time to come or comes with rotten cargo, etc., or worth nothing at all if the boat sank, and worth much more than 10 if the boat returns with precious cargo. So it's a bit the question of the secondary market that it creates. That's the second function. The first function I described with agricultural markets was price formation. The second function is the one that allows financing risk, that is, solving the problem of people who have many projects but no money, and solving the problem of people who have a lot of money and no projects.

One of the functions of the stock market is to solve the problem of people who have too much money and no ideas, and the problem of people who have too many ideas and no money. And so it's a place where we bring together people who need resources to invest with people who need investment to generate returns. And this exists originally. Why do I speak of these first discoveries and colonial expansion and these ships? It's because it resembles in every way the financing of technology. A startup is like a 16th-century ship. A 16th-century ship needs a good crew. If the crew has already crossed the Atlantic, there's less risk, and so the paper is worth more than if it's its first voyage. And so a startup with young first-timers. If the boat is sturdy, it's not the same as if it's a frail skiff. If the rest of the crew is experienced, not just the captain, if it's going to a known destination, there's less risk but less return because it's not alone. And if it's going where no one has been, there's more risk, of course, but there's more return. And so the stock market really serves to finance risk because what we bring or raise on the stock market is equity. What is equity? It's something where you can win everything or lose everything. Unlike debt. Debt is something where the bank or lender gives you a resource where you have to return the same amount plus interest. But if thanks to this debt you made a spectacular deal, the banker only sees the interest. However, the banker receives interest regardless of the project's performance. And so we see that there were impressive levels of risk on colonial expansion, and no banker could take the risk of deploying money because no one knew if the ship would sink or not. I'll add, to continue this analogy, because things that exist today in modern markets were invented at that time, that you can see that the value of your tenth of what you put in at the start changes fundamentally based on the profit perspective the project represents. So if the boat sinks, you've lost everything. If the boat has already arrived and started loading, you have less risk. And so one of the first things, information about the project's prospects is absolutely central to the functioning of the stock market. I'll give you an example: when the ships arrived from La Rochelle to Quebec, the first thing they did was check which other ships had arrived from La Rochelle to Quebec before them and therefore hadn't sunk on the way, and which ship had managed to load the furs. And then when a ship returned before the others to La Rochelle, the first thing it did was share with some the information: 'I'm returning from Quebec, but I saw such and such a ship that had come from La Rochelle arrive just before I left, it didn't sink.' And the value of the paper of the ship that had arrived in Quebec and of which we were told it hadn't sunk on the way increased immediately. The Portuguese, when returning from Brazil, passed through the Azores due to a number of meteorological constraints. And so there were small boats that made round trips between the Azores and Lisbon and said the same thing: 'I'm returning from the Azores, such and such a ship has returned from Brazil loaded with wood, it will be in Lisbon in a few days,' and suddenly the value of the paper increased. So it was really already at that time a question of information at the center of the value of the paper.

Because what the stock market finances is risk. And when risk decreases, the probability of profit increases. When risk increases, the probability of profit decreases. And so the understanding or the ability to anticipate before others what the performance, the performance prospects of the project will be, makes the value of the underlying security. It's also why, over time, especially in the 21st century and the 20th century and in the latter part of the 20th century, a form of regulation was established, notably on insider trading issues, because the hypothesis is that if we want investors to buy paper, to invest, they must feel that information is transparent and the same for everyone, because otherwise it means that those who have information make decisions that others don't, based on information that others don't have, and therefore pick the pockets of those who have less information. It's an unequal game. And so that's why, sorry again for being so long, but it's important to understand that there is a very ancient first function, which is to create prices because we all meet in the same place to sell and buy things. There is another function, which is to raise money to finance risk, because otherwise you are in bilateral relationships between an investor and his partner, but you necessarily go slower than if you have the capacity to mutualize, to collectivize the raising of money. And then there is the third part, which is liquidity, the secondary market. That is to say, at any time, there is a place where when you have something, you can find someone who wants it. That is to say, you can organize asset rotation, and you can also, this is another aspect of the secondary market, raise paper. That is to say, you can decide, when a company is listed on a market, it means it has a money-printing machine in the basement. You can at any time say, 'Listen, my project is going to grow enormously, it exists, it has very impressive development prospects. I propose to those who want to become new co-owners to do so.' And so, I print new shares, it's called a capital increase. I propose new co-ownership shares because the project is going to become bigger, and this capacity when you are a public company—the English call listed companies public companies in the sense of open to the public, not state-owned but open to the public, and PLC is public limited company, a company limited by shares held by the public—when you are in this situation, you have the possibility to organize a constant expansion of the co-ownership of the project through capital increases. So if you want, the three functions of the stock market are: firstly, to allow the creation of prices for things; secondly, to allow raising capital from investors seeking return opportunities under fairly efficient conditions; and thirdly, to organize liquidity, notably through capital increases but also secondary liquidity for all securities.

In fact, conceptually, things haven't changed. What has profoundly changed is the functioning of the interactions between the different actors. But the physical stock market that existed until the 80s—I'm talking about stocks because it's easier to understand—there are some nuances for some markets, but what I say is quite true for other asset classes, notably certain commodities. So you had investors, let's talk about savers, who brought their savings because they were seeking returns. And I assure you I won't abuse historical analogies or digressions anymore. At the end of the 19th century, something absolutely spectacular happened in Europe, and notably in our country, which we have trouble imagining how it was possible between the end of the Prussian invasion and the beginning of the Third Republic, so let's say 1871 and then around 1880. From 1880 until 1914, the world conflict, a small crisis in 1913, but let's say 1913-1914, during this period of less than 40 years, there was an unprecedented explosion of investments. During this period, we made significant private investments, the deployment of a railway network without equivalent, since we had almost twice as many railway lines as today in the country at the time in 1914, with what that implies in infrastructure, steam locomotives, water towers, coal storage, etc., mines with unprecedented coal extraction to allow the rest of the industrial revolution, textiles, the development of all sorts of consumer goods industries that were beginning to develop, carried by the railway, infrastructure, the famous Freycinet canals that exploded at the time, very important public infrastructure. In every village, a public school was built with girls' schools, boys' schools that all look the same when you travel a bit in France in the towns. And in each departmental capital, a high school was generally built, a girls' high school and a boys' high school. Fortifications were built from the North Sea to Italy, to the Alps, what we called the Séré de Rivières line. A very important colonial expansion was financed, which was quite expensive. Port infrastructure in all our colonies, a lot of investment. That was through the stock market. And precisely, I'm coming to that at the same time, all the real estate investments were made. When you look at Paris, you say, 'It's strange, all these avenues that seem like they were built the same year with these buildings that all look alike with a balcony on the 2nd floor and a balcony on the 5th floor, etc.' Well, all that is real estate companies and developments where people bought land on the avenues created by Haussmann and raised money to build houses, to sell either the apartments or collect rents. And so all this mass of investment—and I'm not talking about the Paris metro and I'm not talking about the Eiffel Tower which was built in two and a half years and many other things and the great universal fairs, etc.—the amount of investment was spectacular. How was it financed? There was no welfare state. So the only way to have a bit of income when you were old was to buy securities when you were young or the viager. The viager developed at that time because when you had nothing, the only way to continue to have a bit of money is to sell your house to someone who pays you a rent until your death. But the essential was provided by savings. Initially. So people would go, it would be simple, even the most modest people who were employed on a farm or as a shop assistant in a big store in the town, these people at home, they would go to the post office to buy a government bond, a treasury bond, and they would go to the bank to buy shares in a railway company or a canal, or even Russian bonds. And so this, initially, the functioning of a financial market, there is savings, there is the fact that people earn more than they spend or that they defer their consumption by saving for their old days when they will be too old to work or too tired to work. So it's savings, it's surplus. I'm speaking at the domestic level to understand because everyone understands, but obviously there is the planetary equivalent which are nations, countries that generate more revenue than they consume. So oil monarchies, whether it's an oil monarchy like the Gulf countries or a European oil monarchy like Norway, but also countries that have spectacular trade surpluses like Singapore, which has succeeded thanks to its port infrastructure to build considerable revenue-generating capacities, or trade surpluses like China, Germany even. Exactly. So as soon as you have surpluses, you must invest them. And so, but I took the example of households, it's easier to understand. And so initially, there is savings. Then, this savings used to arrive essentially in banks and insurance companies. And so banks and insurance companies, to speak of the 20th century, would call their stockbroker, that is, a limited number of intermediaries who traded around the trading pit and who would say each time a security's trading opened, 'I'll take this much, I'll take this much, I buy, I sell, I buy, I sell.' And for the market to be efficient, information had to circulate very quickly, and we would note that someone had committed to buy at a certain price, a certain asset in a certain quantity, and someone else had committed to sell at that price. And we would note this crossing between two brokers, and in the evening, we would organize what we call clearing. It's still called clearing, it consists of saying who owes how much to whom, and we would organize in the following days the payment so that the one who was committed to pay would pay the one who was committed to sell. So we completely disconnected, even at that time, the agreement on the quantity and price, which had to be done very quickly, from the realization of the transaction and the payment of the transaction. So there was a commitment before the reality of the transaction. In the functioning of the stock market, there is a complete disconnection between the commitment to buy and the commitment to sell, which must be done very quickly so that the market can extract the most optimal price, and what characterizes the sale we make, the image of the sale we have between us, is that it is complete when the price is paid. In fact, the book for €10 and that's it. Exactly. Or the queue at H&M where as long as I haven't paid, I can't leave with my t-shirt. So we disconnect things, and then there is a third step which is settlement and delivery, ensuring that the security arrives with the one who ultimately bought it and is stored in a safe in the right place. So that's the fundamentals of the functioning of the stock market. An agreement on how many you sell me, how many I buy, a moment afterwards where we trace who bought what from whom, we document it well, a moment where the cash flows, where we pay the price, and a moment where we ensure that the securities are properly registered with a notary of the stock market, which we call settlement and delivery and custody of securities. So that's a very important chain. In the 80s, this entire process was digitalized. That is to say, instead of having a paper certificate representing a share, we put it on a file, on a computer file. Instead of having this share in a paper safe or under the mattress, we put it on a server. Instead of having people exchanging verbal messages around a trading pit and smoking cigarettes and throwing butts in the sand above, we created what we call a matching engine—I don't know what it's called in French—an algorithm on a server. And so we massively digitalized all this, and the entire process I just described: agreeing on how many securities I sell at what price, ensuring we clear who owes how much to whom—because obviously the complexity of clearing is that brokers make a transaction at a given moment by selling securities, but as they sell different securities in different quantities at different prices all day long during the trading session, clearing is at the end how much each broker owes each broker, and it's independent, and he won't pay each transaction during the night or in the following days. That's why it's called clearing. It's that we clear how much in total you owe me and how much in total I owe you. And so, let's say, I speak for, I don't know, 20 investors, you for 30 investors, and some have bought and sold on your side, some have bought and sold on my side. Will we exchange afterwards? We will redistribute to our own clients. Yes, that's called settlement and delivery. But clearing is how much at the end of the day, on that day, I owe you—did you sell me more securities or did I sell more securities to you in the end? And so this clearing, the moment we pay, is at that moment, and so it's infinitely complex. It needs to be fast, and since it needed to be fast, we digitalized all this, and so we entered a world where the trading pit disappeared. In an interesting way, the United States was slower in the digitalization of the 80s and 90s. The Wall Street stock exchange continued to operate with an open outcry, with people operating on a floor, much longer than in Europe. The last time there was a major digital transformation, Europe was ahead of the United States. And now, we are entering a new stage which is what we call tokenization. The great technological movement sweeping through this sector is distributed systems, to speak in French, so blockchain. And so we are entering a process where more and more situations that were digital in the sense of digitalization season 1 are entering a digitalization season 2 where it's obviously still servers and still files, simply a part of these assets will be tokenized. That is to say, instead of being a file on a server in a centralized system that I know, they will be distributed in a decentralized system that I won't know. So in which everyone has the information but no one owns the file. The blockchain, I won't go into details here, but the distributed ledgers. And so this movement is profound and is affecting internally. I don't like the digitalization of assets because assets have been digitalized in reality since the first revolution of the 80s and 90s, and as Camus said, misnaming things adds to the world's misfortune. We can't say we have a digitalization of assets, we have a distributed digitalization of assets. But there you go, that's what's happening. That is to say, it's still the same concepts as 5,000 years ago. It's still the same processes as those invented in the 18th and 19th centuries. It's simply digitalized, and so it's enormous matching engines, enormous servers in data centers, which in our case are in Italy now, which are places that process information extremely intensely with spectacular levels of latency, so speed to speak in French. Several billion messages to give you an order of magnitude. The Euronext machine today is several billion messages per day arriving on the matching engine. With that, we do several million transactions per day, and with these millions of transactions per day, we move about 15 billion euros per day in volume. 15 billion euros per day moving. And well, it's insignificant, but it's about a quarter of what NASDAQ does. It's very small.

That's the goal of tokenization you were talking about. There are many advantages to tokenization, but one of them is shortening clearing delays and settlement and delivery delays.

Let's take things in order. There are direct effects and less direct effects that can be very important. The direct effect is that, in principle, going public is to solve a financing problem. OK. If you need resources to grow, you have two conceptual solutions. Either you convince someone, a bank or a lender, that the projects you're engaged in will have such strong profitability that they should lend you money and you're sure to repay them, and you're ready to pay an interest that corresponds to the cost of capital, the cost of liquidity. And so, for that, your cash flows must be predictable and profitability must be predictable. But that means debt is something that works well for financing companies that are running, but not necessarily companies that are going to take enormous risks. Hmm. OK. And so because there is no debt, because the lender's job is to use the capital that shareholders have given him to know where the risk is and to know he will lend to people who will really repay him and repay him with a price, the interest rate that covers the cost of capital, the cost of liquidity, and the cost of risk. Yes, the lender must never make a mistake, basically. That's his objective. It's not so much that he must never make a mistake, it's that he must have a view on whether the people opposite will be able to repay and pay the interest. A bit like about 58% of French people own their home. For those who bought it themselves, they were asked, we checked if combining personal contribution and the loan, the monthly loan payment doesn't generally exceed, at most, a third of their income. Well, that means it's the same for a company, but the banker wonders what will be the company's profitability and will it be able to pay and support the debt I'm proposing? And so quite naturally, you see that debt financing has many advantages. First, the owner remains the owner of his company and therefore doesn't need to share ownership rights. If he succeeds, he shares profits with no one. If he fails, it's all for him. But the beauty of debt is that it allows, when you have great visibility of performance, to have what we call leverage, that is, to allow you to commit to projects. And if you make a lot of added value, well, you will have raised with a resource whose cost has been capped by the interest rate, something that allows you to make a lot of added value. Life unfortunately isn't only that, because that's predictable businesses or mature businesses, etc. Life is innovation, risk-taking, conviction that you can't always share. I mean, when Christopher Columbus discovered America, well, he didn't know how long the voyage would take, and if he had told someone the duration of the voyage, he wouldn't have found a sponsor. Because we're talking about Christopher Columbus's voyage, we know what we're looking for. We don't know how we're going to find it. Yes, but that's being an entrepreneur. That's being an entrepreneur. But otherwise, it's that Monty Python joke where the guys in armor land on a French beach, plant a big English flag, and say, 'Today is the first day of the Hundred Years' War.' And so real life isn't like that. Real life is: I have a conviction. I've seen things the rest of the world hasn't seen. I think I'm going to make it. I'll align the means, I'll take risks. Give me resources because I propose you become rich, because you will share the co-ownership of the success when it succeeds. Obviously, I can lose everything. Obviously, the boat can sink on the way. Obviously, the boat can sink on the return. Obviously, the company can fail. Obviously, I can arrive at a place and realize that, well, no, there are no more furs because the entire season was completely taken by Dutch merchants who were time to market, I arrived too late. It was a good idea, it was perfect. Except that someone thought of it before and was faster in execution. So that's the stock market. And so when there is risk, you need to raise what we call equity. And equity is simply risk money. So if it works, you take your share of the profits, and if it loses, you'll never save your money. The banker, or the definition of debt, is that if it works, you get the repayment, and if it doesn't work, you also get the repayment. And if it doesn't work at all, you're wiped out by bankruptcy. But there is a scenario where before bankruptcy, you get paid the repayment of your debt. So companies that take risks, companies that are really ambitious, need to solve their financing problem by raising equity. And so there are several ways to raise equity. For a long time, the only way to raise equity was to go public. Now, that has changed a bit in the last 20 years since private equity has developed. Ah, OK. Yes. So in fact, the stock market has always been the basic place where risk-taking is financed. Risk-taking, of course, equity. It was, and that's why the stock market was extremely dynamic during the period I mentioned at the end of the 19th century, because it was the only way to raise...

Money when you were a railway company, you needed a lot of money right away to lay railway tracks, pay for expropriations or compensations for people, do earthworks, build bridges, and all sorts of things. So the need for equity to make capital investments is important. So there's financing risk, financing what is one of the forms of risk, CAPEX, equity investments, capital investments that don't have a short-term return perspective. And so if you're listed on the stock market, you have what I call the money printing machine in the basement, meaning you can say, 'Okay, I'm going to do something enormous, but it won't make money for 5 to 10 years.' But if you're a co-owner at that point, you'll see what you'll see. That's the SpaceX thesis, of course. Even if today, Amazon back in the day, even if at SpaceX the only company that works is Starlink, which is the only asset that makes money, all the others don't make money. People think maybe one day we'll perhaps go to Mars. So if I'm a co-owner of SpaceX, I'll be rich like the first ones who bought Amazon, the first ones who bought Apple, the first ones who bought Microsoft. So that's it, it's the sale of a promise with the ability to raise money and to finance itself even when the company isn't profitable. That's fundamental. That's fundamental.

The second thing is the indirect benefits, which is that it's an element of transformation or acceleration of company transformation. Because when you're listed, first you put yourself in a discipline because the company is regulated. The supervisor basically says the theory of supervision is very simple: you can raise money on the market and tell savers, 'Give me your money on the condition that I provide transparent, coherent, audited information on the asset's performance to avoid fraud.' You can't lie. You can't lie because otherwise it means the investor is being robbed. There was a world at the beginning of capitalism, including stock market capitalism, which was a bit wilder, where it was reserved for people who knew how to validate information. Now, the supervisor says, 'Since you're making a public call for savings, since you're addressing widows and insurance companies and so on, you must provide information so we can compare projects. You must be transparent about what works and what doesn't.' And if you lie, you're prosecuted. And if you lie, it's sanctioned. And so there are real crimes for market manipulation and crimes for disseminating information aimed at market manipulation. And so what's interesting in this phase is that the company must transform itself to be much more rigorous in its communication. And since it's much more rigorous in its communication, it must be much more disciplined in managing the flow of information that goes up from the company to the commission. And so there's a form of hygiene that's very important, notably because regardless of the fact that you have to be transparent and rigorous, you have to be extremely clear. You can't raise money by saying, 'You'll see what you'll see, it went well, give me your money.' That's a bit what Musk does, saying I'm going to go to Mars. But we can see that it can work for certain actors, but because he's already done it in other domains in the past. So that's why there are... Right. No, but what I mean is that apart from these exceptional cases that are messianic, 'Follow me, I'll take you all to liberate Christ's tomb in Jerusalem.' Jobs was also a bit like that in his time. Right. Apart from that, the vast majority of companies can only raise money if they have a hyper-clear strategy. If you come with a company too diversified in its activities, if the strategy isn't simplified, purified, you risk not convincing investors who say, 'But what is this incomprehensible thing?' So it has to be simple and understandable. And so on the occasion of going public, there's a discipline of strategic clarity that we're a bit freed from when we don't need the market. So to raise equity to finance the risk I described a few minutes ago, there's the communication discipline and therefore the structuring of strategy.

Then there's the support for the company's transformation. That is, a company created by entrepreneurs, when its growth advances, we quite naturally discover that among the partners who were relevant at the beginning, some cease to be so 5 or 10 years later, and that a company must evolve its management team when the phases... not always, but it's... and so we can see that it's sometimes difficult to tell people who were essential in the first years, 'Now you're useless, or even you're toxic.' And so evolving the group of people who manage the company is accelerated by the prospect of going public, where investors say, 'Wait, we want someone who's used to managing growth. It's great to have done the development phases, but now we're in something else. We're in global conquest, so show me the people who know how to do it, who have an ambition for global conquest, and not the intuitive and agile people from the beginning, because now I need to manufacture scale, the transition to scale.'