The London Stock Exchange plays a vital role in the UK and global financial systems. It provides companies with access to capital, facilitates the trading of shares and supports the broader economy through price discovery and liquidity. Its long history and global reputation make it a trusted marketplace for investors around the world.
As one of the world’s oldest and most prominent stock exchanges, it plays a central role in the global financial system, offering a marketplace where individuals, corporations and institutions can buy and sell shares of publicly listed companies. Founded in 1801, the LSE is a key player in facilitating trade, investment and raising capital for businesses across various industries.
THE HISTORY OF THE LONDON STOCK EXCHANGE
The origins of the London Stock Exchange date back to the late 17th century, when brokers and merchants would gather in coffee houses in London to trade shares and bonds. One of the most notable locations was Jonathan’s Coffee House, where brokers began to meet regularly. By the end of the 1700s, the need for a more formal exchange grew, leading to the formation of the London Stock Exchange in 1801.
Over the centuries, the LSE has undergone significant changes and reforms. In 1986, the exchange saw one of its most pivotal moments during the ‘Big Bang’ deregulation. This event modernised the stock exchange by introducing electronic trading and eliminating the distinction between jobbers (market makers) and brokers. It also opened up the market to international firms, increasing the competitiveness and efficiency of the exchange. Today, the LSE is a leader in financial markets, blending centuries-old traditions with cutting-edge technology.
FUNCTIONS OF THE LONDON STOCK EXCHANGE
The LSE serves several key functions in the financial ecosystem, all centred around facilitating the trading of securities and helping companies raise capital.
Primary Market
The LSE provides a platform for companies to raise capital through the issuance of new shares. This process, known as an initial public offering (IPO), allows companies to sell shares to the public for the first time. Through IPOs, businesses can raise funds for expansion, development or other financial needs. Once listed, companies are subject to regulatory oversight and reporting requirements, ensuring transparency and accountability to investors.
There are two main markets within the LSE where companies can list:
- The Main Market: This is the LSE’s premier market for larger, established companies that meet strict regulatory and financial standards.
- AIM (Alternative Investment Market): AIM is designed for smaller, growing companies with less stringent listing requirements, making it a more accessible option for startups and emerging firms.
Secondary Market
After a company’s shares are listed on the LSE, they can be traded on the secondary market. This is where investors buy and sell shares that have already been issued. The secondary market ensures liquidity, enabling investors to easily trade their shares and providing the company with an ongoing valuation based on market activity.
Price discovery and market efficiency
One of the crucial roles of the LSE is price discovery, where the prices of stocks are determined based on supply and demand dynamics in the market. This transparent pricing mechanism helps investors make informed decisions and ensures that assets are priced fairly.
The efficiency of the LSE also lies in its ability to match buyers and sellers in real-time, thanks to its highly advanced electronic trading systems. Market participants can trade from anywhere in the world and the exchange operates under strict regulatory standards to ensure a fair and orderly market.
Indices
The LSE hosts several important indices, which are used to track the performance of groups of companies and provide insights into broader market trends. The most well-known index on the LSE is the FTSE 100 (Financial Times Stock Exchange 100), which tracks the performance of the 100 largest companies by market capitalisation listed on the exchange. Other significant indices include the FTSE 250 (the next 250 largest companies) and the FTSE All Share (all eligible companies listed on the Main Market, providing a broader view of the UK stock market).
HOW COMPANIES LIST ON THE LONDON STOCK EXCHANGE
To list on the LSE, companies must meet a set of criteria that vary depending on the market they wish to join. The Main Market has more rigorous requirements compared to AIM, as it caters to larger, established companies.
For a Main Market listing, companies must meet the following standards:
- Minimum market capitalisation: A company must have a minimum market cap of £700,000.
- Financial history: A company must have audited financial statements going back of at least three years, or for their full history if shorter.
- Public float: At least 25% of a company’s shares must be publicly held.
Companies listed on AIM enjoy more flexibility, with fewer requirements in terms of financial history and public float. This makes AIM an attractive option for growing businesses looking to access public capital without the burden of stringent regulations.
REGULATION AND OVERSIGHT
The LSE operates under strict regulatory frameworks to maintain market integrity and protect investors. Companies that list on the LSE must comply with rules set out by the Financial Conduct Authority (FCA) and other regulatory bodies. These rules ensure transparency, fair trading practices, and accountability.
Additionally, the LSE has its own internal rules and standards to ensure orderly trading. Listed companies are required to provide regular financial reports, disclose material information and adhere to corporate governance practices. The goal of this regulatory oversight is to maintain confidence in the market and protect investors from fraudulent activity or market manipulation.
TECHNOLOGY AND THE LONDON STOCK EXCHANGE
The modern LSE relies heavily on technology to facilitate trading and enhance market efficiency. In 2009, London Stock Exchange Group acquired the Millennium Exchange trading platform, which is known for its speed and scalability. This electronic system allows market participants to trade stocks in fractions of a second, providing real-time price updates and enabling efficient execution of trades.
The exchange also offers a range of data services, providing investors with access to real-time market data, historical information, and analytics tools. This data is critical for making informed investment decisions and helps to drive overall market transparency.
INTERNATIONAL REACH AND GLOBAL INFLUENCE
While the London Stock Exchange is based in the UK, its influence extends far beyond British borders. It is considered one of the top global exchanges, attracting companies from all over the world. Many international companies choose to list on the LSE to gain access to its deep pool of investors and its well-established regulatory framework.
In 2007, LSEG merged with Borsa Italiana, Italy’s stock exchange, further expanding its influence in Europe and creating the London Stock Exchange Group (LSEG). More recently, in 2021, the LSEG completed its acquisition of Refinitiv, a global provider of financial market data and infrastructure, further cementing its role in the global financial ecosystem.
CHALLENGES AND OPPORTUNITIES
The LSE, like all stock exchanges, faces a range of challenges in a rapidly changing global landscape. Increased regulation, political instability (such as Brexit), and technological disruptions all present potential risks to the market.
Brexit in particular has raised questions about London’s future as a financial hub. However, the LSE has remained resilient and London continues to be an attractive destination for international companies seeking capital. The LSE’s strong regulatory framework, advanced technology and deep liquidity have helped it maintain its position as a key player in global finance.
The rise of alternative trading platforms and cryptocurrencies also poses a challenge, as investors now have more options for trading assets outside of traditional stock exchanges. However, the LSE’s commitment to innovation and its adoption of new technologies suggest that it will continue to evolve in response to these trends.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.