The London Stock Exchange

History of the London Stock Exchange

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The beginnings of the London Stock Exchange (LSE) date back to the late 1600’s, when traders began to buy and sell shares in companies that wanted to raise money for exploration and trading in the new markets around the world. This trading activity took place in the coffee shops near the Royal Exchange (itself a place for merchants to trade) the most notable of which was Jonathan’s Coffee House.

Investors were enticed by the potential for large profits from companies building ships, exploring new lands and sea routes, and returning with vast quantities of valuable cargo. However, with communication between ship and homeland often taking weeks if not months many investors lost small fortunes when ships sank in uncharted waters with their cargo lost to the world forever. The so called “South Sea Bubble”, where prices of stocks of trading companies traded ever higher, burst in 1720, causing many investors to fall into bankruptcy and prompting parliament to intervene and initiate the first rule book governing stock trading in London.

In 1773, a number of brokers set up a more formal stock exchange in Sweetings Alley, though it wasn’t until 1801 that the modern LSE was founded. Members were required to register with the exchange and the first codified rule book was introduced little more than a decade later.

Through many ups and downs, and the difficult times of two World Wars, the LSE finally arrived at 1986 and deregulation of the market – known as ‘Big Bang’.

The effects of stock exchange deregulation

Prior to October 26th 1986, the Stock Exchange was viewed as an exclusive members club. The Big Bang changed the way the exchange and stock market operated and opened the ownership of LSE member firms to outside corporations for the first time.

Now, member firms were allowed to operate as brokers and market makers – formerly they could only be one or the other. A long and detailed new rule book was introduced to formalise the treatment of clients and other LSE firms in the new regime of dual capacity broker/ dealers.

In a move to create competitiveness and open the market to the man-in-the-street, especially with the then Conservative government encouraging wider share ownership through its privatisation program, minimum commissions were abolished.

Finally, trading of shares moved off the stock exchange floor and was conducted electronically or over the telephone, with market makers and brokers sitting in their separate offices. For the first time, brokers from the provinces could negotiate price directly with market makers in London.

The modern LSE

The LSE is now the fourth largest stock exchange in the world, and the largest in Europe. It is ideally placed between the markets of the Far East and North America to act as a conduit between the closing of the important exchanges of China, Japan, and Hong Kong and the world’s two largest stock exchanges: Nasdaq and the New York Stock Exchange.

There are now thousands of companies with shares listed in London, and trading has largely moved from a market maker system to a hybrid system, where clients can place orders directly to the market through their broker.

It now operates several markets in the UK, the most notable of which is the Main Market and AIM.

LSE Main Market

This is the market on which the largest and best established UK companies are listed and traded. Volume of shares traded are vast and market makers and brokers place orders side by side through electronic order book, SETS (Stock Exchange Trading System). Companies listed on the main market have to adhere to stricter reporting requirements and a more rigorous initial public offering (IPO) process.

AIM

The Alternative Investment Market was introduced in 1995 as a market to encourage growth companies to list their shares and participate in fund raising potential. The companies listed on this market are smaller than those listed on the main market. It is often seen as a stepping stone to full listing in the future by small and medium size companies wishing to have their shares publically traded.

Measuring the performance of the Stock Market

As with all stock markets, the LSE’s performance is measured through a variety of stock markets indices, the most notable of which is the FTSE 100 Index. This index measures the movement of the share prices of the top 100 companies listed in the UK, and is seen as the benchmark index for the health of UK companies.

The FTSE All Share Index represents 99% of the entire market capitalisation of the LSE, and as such is the widest measure of stock market health in the UK.

In summary

The London Stock Exchange regulates one of the oldest and largest stock markets in the world. Of all the world’s stock exchanges, the LSE can consider itself to be the most international with 3,000 companies from 70 countries listed for trading. It regulates the dissemination of trade, pricing and company announcement data, as well as providing the trading services that allow an orderly market in quoted companies.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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