London Stock Exchange Limited
London Stock Exchange Limited
Founded: 1773 as The Stock Exchange
Operating Revenues: £149.8 million (US$93.19 million) (1999)
NAIC: 52321 Securities and Commodity Exchanges
The London Stock Exchange Limited (LSE) is the world’s oldest stock exchange and one of the top three stock exchanges in the world, after the New York and Tokyo exchanges. Founded in 1773 and reincorporated as a private limited company in 1986, the LSE is also the world leader in international share trading. The LSE operates a number of market products, including the main board listing, featuring more than 3,000 companies and including over 500 international companies, as well as the secondary AIM (Alternative Investment Market), established in 1995 as a vehicle for trades in small, high-growth companies. More than 70 companies are listed on the AIM board. After launching the Stock Exchange Electronic Trading Services (SETS) in 1997, the LSE introduced a new listing, techMARK, tailored to the specific needs of the high-technology sector and designed to compete with the NASDAQ index. With a total equity turnover value of more than £3.5 billion, the LSE achieved gross revenues of £149.8 million in 1999. The LSE is led by Chairman John Kemp-Welch and CEO Gavin Casey.
A World’s First in the 18th Century
Founded in 1773, the LSE reflects more than 200 years of the development of share-based enterprise. The world’s first joint-stock company was created in the mid-16th century. Traditionally, companies were either owned by a single individual or through a partnership with two or more owners. While this arrangement sufficed for smaller businesses and stable market sectors, direct financial responsibility for riskier endeavors—such as the great trade exploration voyages of the period—were judged too precarious for an individual or limited group of investors. The organization of such a venture, that of a voyage to trace a northern sea route to the Far East from London in 1553, introduced the world’s first shareholder-based company. Selling shares to a larger number of investors reduced the financial risk for each individual investor, while enabling the company itself to raise the capital needed to fund its operations.
This first joint-stock company failed to find a northern sea route to the Far East. However, a meeting with Russian tsar Ivan the Terrible brought the company the exclusive rights to trade between Russia and England. The Muscovy Company, as it came to be called, became a commercial success, rewarded its shareholders with large profits, and inspired the creation of new investment ventures. The Muscovy Company served as the model for future shareholder-based companies. Investors contributed capital funding, while direction of the company’s operations remained in the hands of its management. The investors, who were allowed to sell their holdings or buy more shares, were given dividends according to the company’s profits.
As more companies were set up following the Muscovy model, a new profession came into being, that of the broker, who acted as a middleman for trades of shares, helping to boost not only the number of joint-stock companies but also the number of investors. Adding impetus to this movement was the foundation of the Bank of England as a joint-stock company by King William III in order to provide funding for England’s military campaign against France at the end of the 17th century. The shareholder system was given further support by legislation to limit and punish brokers for malpractice.
By the 18th century, a flourishing “market” for shares was in place—so much so that the period marked the first stock market crash in 1720. While trading took place at the Royal Exchange through the middle of the century, the rowdy behavior—itself to become something of a tradition on the market floor—of certain brokers led to their exclusion. Instead of leaving the business, these brokers began meeting at Jonathan’s Coffee House and other coffee shops in the Threadneedle Street area of London. In 1760, some 150 brokers founded their own club to buy and sell stock at Jonathan’s. The following decade, in 1773, the members of the club changed its name to the Stock Exchange.
As the individual broker members of the Stock Exchange began to establish brokerage firms, and the number of markets expanded, the Stock Exchange saw a need for new quarters. In 1801, the Stock Exchange began construction on a new building at what was to become its permanent London location. The following year, the Stock Exchange published a Deed of Settlement, formally outlining the operating rules and procedures of the stock market.
If the original joint-stock companies were formed to provide funding for the many voyages of discovery, overseas trading, and foreign military campaigns, the shareholder-based company structure showed itself easily adaptable to the changing economic landscape of the 19th century. The Industrial Revolution, coupled with such major infrastructure undertakings as the building of a national railroad system, provided the basis for the modern period of shareholder-based corporations. The appearance of a great many new companies exploiting a greater number of materials, products, and markets prompted the formation of some 20 other stock exchanges operating in the United Kingdom. Nonetheless, the London Stock Exchange remained the United Kingdom’s most important stock exchange. New technologies, such as the telegraph, brought such stock market innovations as the ticker tape—the first, launched in 1872 by the London Stock Exchange, was capable of an output of six words per minute—which in turn enabled trades to take place elsewhere than the market floor. London’s position as the world’s financial center placed the LSE at the top of the world’s stock markets.
At the end of the 19th century, the LSE revised its charters. Changes in the Deed of Settlement in 1875 created a more corporate-based entity for the Exchange, which now operated on behalf of its owner-members—as opposed to being operated by its members—while members remained responsible for the company’s debts and operational obligations. A further evolution occurred in 1890, when the country’s stock exchanges were linked together for the first time, under an Association of Stock Exchanges. The individual exchanges continued to operate independently, however. At the beginning of the 20th century, a new set of guidelines refined the Stock Exchange’s member lists into “broker” and “jobber” classes.
Disruption in European trade caused by the outbreak of World War I led to the closure of the continent’s stock exchanges. The LSE was forced to follow suit, suspending trades in July 1914, the last of the European exchanges to close. The Exchange’s members quickly joined the war effort, creating the Stock Exchange Battalion of Royal Fusiliers, which succeeded in raising more than 1,600 volunteers. After it became evident that the war was to be a protracted one, the LSE reopened at the beginning of 1915. Normal trading conditions were not restored, however, until the end of the war in 1918, when the British government introduced a highly successful series of “Victory Bonds.”
If the British market was largely spared the brunt of the New York stock market crash of 1929, the LSE was nonetheless forced to end trading in U.S. shares. While the buildup to World War II enabled the world’s stock markets to regain their momentum, the devastation of the European economy brought on a vast change in the world economic and stock market landscape. The rise of the United States as the world’s preeminent economic force saw the New York Stock Exchange outpace the LSE as the world’s busiest and richest exchange. The rise of Japan as an economic power beginning in the 1960s and especially into the 1970s and 1980s saw the Tokyo Stock Exchange take over the number two position.
Nonetheless, London remained the center of the European community’s financial markets, and the LSE gained increasing importance in the market for international stocks. London was also to figure prominently as the undisputed financial center of the then-forming European Union. Meanwhile, the stock markets were attracting larger numbers of investors, and especially investments from private individuals. The Exchange’s member firms saw the need to expand their broker staff to accommodate the new influx of investors as well as the new investment products being introduced at the time. The increasing activity led to the need for new quarters; in 1972, the new LSE building, featuring a new 23,000-square-foot trading floor and a 26-story office building, was completed on the site where the Exchange had operated since 1801. In the same year, women were granted the right to become stockbrokers for the first time.
Increasing competition and technological development had also brought about both the need and the potential to consolidate the United Kingdom’s many stock exchanges. The cooperation that had begun under the Association of Stock Exchanges had led to closer coordination among the United Kingdom’s stock exchanges, and particularly among the more than 20 exchanges operated outside of London. The new market realities of the late 20th century were increasingly challenging the viability of these smaller exchanges. In 1973, moves were taken to combine the United Kingdom’s smaller provincial exchanges into a single national exchange under the LSE.
Developing our Markets: Our task is to ensure that we continue to win business for our markets and for London. Our portfolio of markets, designed to meet U.K. and international needs, provides the infrastructure which enables companies and investors to prosper, as well as meeting the needs of securities firms. Regulating our Markets: To maintain investor protection, as well as a fair and efficient marketplace for issues, we keep our rules and procedures under regular review, remaining responsive to customers’ needs and to changes in the business environment. Delivering our Markets: In delivering our services, we aim for the best possible combination of responsiveness, reliability, functionality and cost. We are committed to providing a consistently high level of service to all our customers —whatever the conditions prevailing in the market.
The year 1986 marked a new era for the LSE. Changes in the legislation governing the United Kingdom’s investment businesses, as part of the Companies Act of 1985, enabled the LSE to restructure its operations the following year as a private limited company (plc) with its member broker firms becoming shareholders. Under the company’s articles of incorporation, these shareholders were not eligible to receive distribution of any profits. Instead, all profits were to be returned to the company for infrastructure and other development costs.
On October 27, 1986, the LSE underwent a still more visible transformation. Known thereafter as the “Big Bang” of the London financial scene, that day saw the implementation of several changes to the LSE’s operations. For one, the company’s member firms were now allowed to be purchased by outsider corporations, enabling these brokerages to increase their own capital resources in order to compete with increasingly powerful firms overseas. Another change was the abolition of minimum commission charges; stock exchange member firms were now free to negotiate their commissions with clients. At the same time, the individual members of the exchange no longer held voting rights. Moreover, marking the end of centuries of tradition, trading was moved off the trading floor to so-called “dealing-rooms,” where trades were no longer conducted face-to-face but by computer and telephone. The days of the “rowdy” broker were done, at least in London. The introduction of computer technology, which enabled instantaneous pricing displays anywhere in the United Kingdom—or even the world—also allowed brokers to operate offices beyond London. The appearance of new commercial brokerage branch offices soon became commonplace across the United Kingdom.
The LSE’s Deed of Settlement, in place since 1885 and originally introduced in 1802, was finally replaced by a Memorandum and Articles of Association in 1991. Under the new articles, the LSE’s governing body, the Council of the Exchange, was replaced by a board of directors drawing not only from the Exchange’s own management but also from its member and client base.
Changing Financial Climate in the 1990s and Beyond
The LSE faced rising pressures to adapt to the changing nature of the stock market in the 1990s. On the one hand, new technologies-particularly electronic trading systems that were rapidly rendering obsolete the Exchange’s reliance on telephone confirmations—were stepping up the pace of trading and enabling trading to continue nonstop around the world; as Western markets closed for the day, their Far Eastern counterparts were just beginning trading. On the other hand, playing the stock market was becoming popular among larger portions of the population, with resulting pressures to make trading more accessible.
At the same time, a new breed of company was making evident the need for a new type of stock exchange. The roaring success of so-called “start-up” companies, that is, high-technology specialists that often went from zero to enormous market capitalization in brief periods of time, gave new impetus to exchanges, such as the NASDAQ, that were able to offer the flexibility these new companies, which often had yet to show a profit, required. In 1995, the LSE responded to this new market with the creation of AIM, the Alternative Investment Market, created specifically for startups and smaller companies. By the end of the decade, AIM had managed to attract nearly 400 companies.
In 1997, the LSE undertook another new venture with the introduction of the Stock Exchange Electronic Trading Service (SETS), which replaced—at least for some brokers and trades—traditional techniques with an electronic interface. Meanwhile, the LSE was preparing to confront the new realities of the European Market, as the EC prepared for the launch of the Euro, the single European currency. With Frankfurt winning the position as the site of the European Central Bank, London suddenly found its position as European financial leader under attack. In order to defend its position, the LSE quickly entered into a partnership agreement with the Deutsche Börse in Frankfurt.
Momentum among high-technology stocks continued to build in the waning years of the century, when much of the world began preparations to enter into a new economic landscape, the so-called Internet Economy. In 1999, in order to provide a more appropriate vehicle for this new breed of stock, the LSE launched the techMark exchange. This new exchange, modeled directly on the NASDAQ and the Neuer Markt of Germany, provided still more flexible listing conditions for high-tech and startup companies.
- The world’s first joint-stock company is founded.
- The Bank of England is formed as a joint-stock company.
- Legislation governing brokers is introduced.
- A stock broker’s club convenes at a coffee house in London.
- The stock broker’s club adopts a new name: The Stock Exchange.
- A permanent exchange site is constructed.
- The ticker tape is introduced.
- Association of Stock Exchanges is founded.
- Wall Street crash ends the Exchange’s trading in U.S. stocks.
- A new Stock Exchange building is opened.
- England’s provincial exchanges are combined; women are allowed on trading floor for the first time.
- The Exchange reorganizes as a private limited company; electronic trading is initiated.
- An alliance with Germany’s Frankfurt Exchange is forged.
- An alliance with eight European exchanges is finalized.
As the LSE entered its fourth century of trading, it continued to show the willingness to evolve and embrace new economic realities that had enabled it to maintain its position as not only the world’s oldest stock exchange, but one of the world’s leading exchanges. In early 2000, the LSE began reviewing a number of its policies—including allowing anonymous eleetronic trades for certain companies—meant to bring London in line with the policies of a new alliance among exchanges in Amsterdam, Brussels, Frankfurt, Paris, Madrid, Milan, and Zurich, scheduled to begin trading in November 2000.
New York Stock Exchange, Inc.; Paris Bourse SA; Tokyo Stock Exchange.
Andrew, John, “Understanding Stock Markets: Deals Were Done,” Independent, November 1, 1997, p. 5.
Garfield, Andrew, “London Stock Exchange to Launch Rival to NASDAQ,” Independent, August 21, 1999, p. 15.
Jagger, Suzy, “Exchange Overhaul Attacked by Dealers,” Daily Telegraph (London), January 3, 2000, p. 1.
“London’s Quiet Revolution,” Economist, October 18, 1997.
“London Under Threat,” Economist, November 21, 1998.
—M. L. Cohen