The London Stock Exchange

What actually is the London Stock Exchange, and what does it do?

How it all started

Back in the mists of time, expensive ventures, like building ships and heading off on trading voyages, could only be undertaken by wealthy individuals or by groups working together privately. But with the advent of industrial revolution, empire, and the growth of an increasingly affluent merchant class, the pool of wealth that could potentially be harnessed for business grew, and an effective way of bringing together strangers with investment cash was needed.

So was born the idea of the joint stock company, in which anyone with cash to invest could buy themselves a share and take a proportional cut of the venture’s profits. Of course, somewhere to actually get together, where proposals could be floated and investors sought, was needed.

In London, around the tail end of the 17th century, this business was carried out in the coffee shops around the city’s Change Alley, most notably in Jonathan’s, where funds were raised and stock and commodity prices were posted.

The LSE is born

In 1801, the London Stock Exchange itself was founded, in Threadneedle Street, where it operated until its move to Paternoster Square in 2004. The growing industrial boom of the early 19th century saw the exchange grow, together with the need for regulatory activities governing the operation of brokers, the reporting of figures, the payment of dividends, etc.

Although it quickly grew to become one of the largest stock exchanges in the world, the actual operation of the LSE didn’t really change significantly until the late 20th century, and it essentially acted as a floor where brokers (or their agents) could meet face-to-face, publish prices, and enact deals by a method known as “open outcry” — literally shouting out prices and communicating by arm-waving gestures in order to arrive at deals.

In 1971, the LSE’s landmark Stock Exchange Tower was opened, housing what was at the time one of the world’s largest share trading floors. But with rapid progress in computer technology, the days of those colourfully dressed, arm-waving, traders were numbered.

The Big Bang

On 27 October 1986, dubbed “Big Bang Day”, two major changes happened, both of which were intended to boost the LSE’s waning competitiveness against the world’s other large exchanges.

Firstly, open-outcry trading was abolished, and replaced by computer-matched on-screen trading. This made things more efficient and cheaper to operate, and through greater transparency reduced the possibility of price manipulation.

Secondly, the market was extensively deregulated, sweeping away the traditional “old boys’ network” and opening up trading to modern free-market competition.

We’re still feeling the benefits of that bold move today, as the increasing growth in technology has enabled us all to check our share prices online whenever we want, and to buy and sell our shares via online brokers. And, of course, the deregulation has led to much lower prices — the days when you could only buy shares through pin-stripe full-service brokers charging eye-watering commissions are long gone.

Markets

Today, the LSE provides two equity markets, with different degrees of regulatory requirements (and so different margins of safety). The Main Market is the one that everyone knows, which hosts the FTSE 100 list of the UK’s largest companies, together with various other indexes. These including the FTSE 250 (the 250 next largest), the FTSE Small Cap index of smaller companies, and others. Those three main indexes make up FTSE All-Share index, listing over 900 companies and accounting for nearly 99% of the value of all of the UK’s public companies.

The LSE also operates the Alternative Investment Market (AIM), which has less stringent listing rules and is more affordable for companies to list on. Traditionally the home to smaller companies, these days quite a few of the largest AIM companies (on the AIM-100 index) have market values into hundreds of millions of pounds.

The remaining two markets provided by the LSE consist of the Professional Securities Market (PSM) and the Specialist Fund Market (SFM), which most private investors will never encounter.

Functions

Today, the London Stock Exchange fulfils four main functions.

Firstly, it fulfils its original function, dating back to the days of Jonathan’s, of providing companies with a forum for raising capital — by initial public offering (IPO, or “flotation”), and by later secondary issues of stock.

Secondly, the LSE provides trading services, by which investors can trade shares, and other instruments and commodities, with each other, via the intermediaries of their brokers and the LSE’s electronic trading systems (the main one being SETS).

Thirdly, the LSE provides information — share prices, and news and other information via its Regulatory News Service (RNS).

And finally, the LSE provides a derivatives market, through its EDX service.