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The London Stock Exchange has been in the news with a stream of competing takeover bids. What is going on?
The situation changes on an almost daily basis but the current position is that Nasdaq, the US electronic exchange, has put in a bid worth £2.4bn. The New York Stock Exchange (NYSE) is believed to be considering a counterbid. These are the latest in a series of attempted takeovers that have also involved Deutsche Börse, the German exchange, and Euronext, the Paris-based exchange operator. It all started in early 2000 when Frankfurt-based Deutsche Börse and the LSE discussed plans for a merger that later would have also involved Nasdaq. Criticism of these plans was strong and the deal was killed off when OM Group, which runs the Swedish stock exchange, made an unsuccessful £800m takeover bid – the first-ever hostile bid for a stock exchange.
Why is the LSE so attractive to all these foreign bidders?
It is the third largest stock exchange by turnover – behind the NYSE and Nasdaq. Because it has such huge volumes of trade, the LSE is a very liquid market (meaning it is easy to buy and sell shares) and spreads (the difference between buying and selling prices) tend to be narrow which is appealing to investors. It also occupies a favoured spot halfway between the Asian and North American time zones.
Following the introduction of rules in the US that require publicly-listed companies to submit an annual report on their internal accounting controls to the Securities and Exchange Commission, London has proved even more attractive for non-UK companies as a place to list. It would also appeal to an exchange seeking to expand its trading of internationally-traded shares.
But how can you bid for a stock exchange? Surely an exchange is a place where other companies are quoted?
For most of its life the exchange was a club. Its origins go back to 1698 when an enterprising businessman, John Castaing, began producing a list of stock and commodity prices. In 1761 a group of 150 stockbrokers and jobbers formed a club to buy and sell shares. The exchange in this form survived speculative bubbles such as railway mania in the 1840s as well as a V2 rocket strike until 1986 and Big Bang – the most important event in the exchange’s recent past.
What was Big Bang?
This was the complete upheaval of the old exchange. It was driven by growing competitive pressures and the development of the City from a clubby English institution into an international centre of securities trading. The rules were changed to allow exchange members to be owned by outside companies. The historic distinction between jobbers, who made markets on their own account, and brokers, who alone could deal directly with the public, were done away with to create broker-dealers. Trading moved off the market floor – housed in an ugly 1970s building close to the Bank of England – and was henceforth conducted by computer and telephone from dealing rooms in banks and broking houses. Anarchists who attempted to storm the stock exchange in 1999 appeared not to realise that the trading floor had long since evaporated into cyberspace. The exchange is now in a pastiche neoclassical office block near St Paul’s Cathedral.
So what does the London Stock Exchange actually do?
It operates three main computer platforms on which shares are traded. Seaq, the stock exchange automated quotation system, dates from 1986. It handles trading in the smaller, less liquid stocks. SETSmm, (the stock exchange trading system market maker) deals in the 50 largest Aim stocks as well the FTSE 250 Index, while SETs handles the FTSE 100 stocks, the UK’s biggest listed companies. The LSE also provides pricing information through its own Proquote system while it sells its data to other information providers such as Reuters and to banks and brokers. It promotes new products – such as exchange traded funds – that will boost volumes traded on its platforms and also promotes itself to companies considering a listing.
Isn’t it in charge of regulation?
Regulation of London listings passed to the Financial Services Authority in 2000. But the exchange has its own supervision team that keeps a close eye on the market and liaises with the FSA. The LSE has more powers over the Aim market – though market abuse issues would still go to the FSA. The LSE can discipline members and companies by fines and private or public censure.
Why is it being bid for now?
The exchange turned itself into a public limited company in 2000 and the following year it celebrated its 200th anniversary by listing on its own main market. Once the LSE became a listed company it was open to bid approaches.
What will happen if one of the bids succeeds?
The LSE’s trading activities would probably be merged with those of the bidder to create a single market. Cost savings could also be made. In the longer term, you have to question the value of even large regional exchanges. Many regard the creation of a single global exchange trading across time zones as the most desirable outcome.