The London Stock Exchange has gone through many changes to stay relevant over the past 30 years, switching focus from shares to data
by Anthony Hilton FCSI(Hon)
One of the leaders in the City of London told me that after Big Bang in the mid-80s when the Stock Exchange began to modernise, private client stockbrokers and back office staff were in danger of falling down the cracks. Accordingly, two representative bodies were created: the Association of Private Client Investment Managers and Stockbrokers in 1990, later known as the Wealth Management Association, and the Securities Institute in 1992.
The Institute has flourished over the past two decades as a global examining and representative body for the development of financial and investment professionals. The Royal Charter in 2009 reflected this and led to the change of name to the Chartered Institute for Securities & Investment (CISI).
As much as these bodies have changed, the London Stock Exchange (LSE) has changed even more. In the 80s it abolished minimum commissions and opened its membership, with the likes of Deutsche Bank and Barclays gaining access for the first time. Sir Nicholas Goodison, then chair of the LSE, said the point of this upheaval was to cement the Exchange’s role as the UK’s single market for shares. Well, if that was his aim, he failed.
Computerised exchanges came on the scene trying to gain a slice of share trading. They did not make much money but the LSE’s share of the market fell enough for people to notice. Eventually the LSE decided that if you can’t beat them, join them, and bought the first such new exchange, Turquoise, in 2009. Unfortunately, the share-trading horse had bolted by then.
An even bigger shift was the growth of high-frequency trading where successive innovations cut the process of buying or selling shares to microseconds. This helped the well-capitalised firms because they could invest in technology. Shares might be available for only a microsecond, so expensive share-trading computers were set up near the LSE because even the electrical impulses across the wires made a difference – what was known in the trade as latency. This in turn helped the growth of computerised counterparties which collated order flow from other brokers and became one of the LSE’s biggest customers.
At the same time, dark pools flourished. These were used by institutions who wanted to buy or sell shares in bulk, but instead of using the LSE, they dealt with Goldman Sachs or another of the well-capitalised houses. Their clients moved the shares. This effectively cut the LSE out.
The LSE knew this was happening and tried to hit back. One idea was to rebrand itself as the International Stock Exchange to try to attract foreign listings. This was abandoned. It tried to create a market for technology stocks but this, in time, also failed. It tried unsuccessfully to buy the London International Financial Futures and Options Exchange, which would have given it a much wider reach. It would have made sense, but the bid failed.
The LSE knew this was happening and tried to hit back
At the same time, there was a long quarrel about the ‘tape’ – the feed that disseminated real-time share prices. The LSE would only let other exchanges contribute their share-trading prices later, which meant, being first, that the LSE had the advantage. It is interesting that, though we may not have known it at the time, this was one of the first inklings that the LSE would become, in future years, predominantly an information provider.
Meanwhile, all these innovations caused a huge surge in share volumes, which seems to signify that Big Bang and what followed was a considerable success. But Professor Sir John Kay punctured this balloon. In 2012, he published his Review of UK equity markets and long-term decision making at the behest of Vince Cable, the then business secretary in the Coalition government. Kay observed that, in aggregate, companies no longer went to the LSE to raise capital – its traditional raison d’être. Rather than go public for funds, companies increasingly went to the debt markets. Additionally, business was shifting from capital-intensive industries like steel or shipbuilding to focus on software, which used brains rather than money. The number of listed companies was falling, and the market was becoming primarily about buying and selling existing shares – secondary trading.
The LSE realised that share trading was becoming a commodity and it wanted growth, so it bought Russell Indices in 2014. This was followed by Mergent in 2016, Yield Book in 2017, and Beyond Ratings in 2019, which were information providers. In 2021, it bought Refinitiv. As a result, the LSE Group’s annual report 2021 shows that three-quarters of group revenue will come from data. It is successful but it is not at all what Sir Nicholas Goodison envisaged.
The full article was originally published in the September 2022 edition of The Review.
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