2.2.2 The London Stock Exchange – evolving to compete
In Week 1 you looked at the development of the London Stock Exchange and at the changes to its operation and regulation that followed Big Bang. So what does the Stock Exchange currently do and what is now traded on the exchange?
The activities of the exchange can be divided first into transactions in shares and those in fixed-interest securities. The latter, often referred to as bonds, are issued by the government and by firms to raise finance, normally for defined maturity periods.
The Stock Exchange’s trading activities currently take place in four markets:
- Main Market (UK and international)
- Alternative Investment Market (AIM)
- Professional Securities Market (PSM)
- Specialist Fund Market (SFM).
The Main Market – sometimes referred to as the Official List – comprises shares issued by firms that have their main share listing on the Stock Exchange and which satisfy its criteria relating to size, profitability and ownership. Some UK-listed firms do also list their shares on other exchanges (e.g. the New York Stock Exchange), particularly if they have extensive international activities. The Stock Exchange’s Main Market is the most tightly regulated of its share markets.
The Main Market includes both UK and international firms. The latter are overseas firms that have a listing in their own country, but who believe that an additional listing on the Stock Exchange enhances the visibility and marketability of their shares. There is also a subdivision of the Main Market called techMARK, which is a grouping of technology firms. TechMARK was originally launched in 1999 at the time of the boom in ‘dot-com’ firms, whose business activities are linked to, or transacted via, the internet.
The AIM was established in 1995 and is less tightly regulated than the Main Market. The AIM is aimed at smaller, often newly established firms, including overseas firms with an insufficient financial track record to join the Official List. As with the Main Market, AIM includes UK and international firms.
The PSM, opened in 2005, is used by firms to raise finance through the issuance of specialist bonds, including debt and depositary receipts that are sold to professional investors such as financial firms and investment funds.
The SFM, launched in 2007, is the Stock Exchange’s market for specialist investment funds. The market targets institutional, professional and other investors deemed to be ‘highly knowledgeable’.
The table below show the trends in the numbers of firms using the Stock Exchange to raise capital over the past five decades. The clear trend is for fewer firms to use the Main Market – although this may be ascribed, in part, to merger activity in recent decades reducing the number listing on the Main Market. A second clear trend is the growing popularity of AIM.
The two main types of bond issuance in the Stock Exchange’s markets are UK government securities and Eurobonds.
Government securities, also known as ‘gilt-edged stock’ or just ‘gilts’, are issued in accordance with the borrowing requirement of the UK government, which in turn is dictated by the government’s fiscal policy (its policy on taxation and public spending) and by economic conditions. Normally, the need to borrow through the issue of gilts rises as economic growth slows, as a result of the consequent adverse impact on tax receipts. If tax receipts fall – as they normally do during an economic downturn – the government is more likely to have a shortfall on income relative to its expenditure and is thereby forced to borrow more to close the difference between the two. The responsibilities for arranging the issue of gilts lie with the UK’s Debt Management Office.
Eurobonds are bonds issued by the larger firms – particularly financial firms who use the proceeds from bond issues to finance their lending activities.
In October 2007, the Stock Exchange merged with the Italian exchange, Borsa Italiana, creating Europe’s leading diversified exchange group.
Then, in February 2016, it was announced that the London Stock Exchange was in merger talks with Germany’s stock exchange Deutsche Bourse. This merger was agreed by the London Stock Exchange in March 2016. So, further major developments in the history of the London Stock Exchange are currently unfolding.