London Stock Exchange

Detailed Definition

The London Stock Exchange (LSE) is a major financial securities market located in London, UK. Its origins can be traced back to the seventeenth century when dealings in securities began in London. The term ‘Stock Exchange’ was first used in 1773 for New Jonathan’s Coffee House, although it was formally constituted as the London Stock Exchange in 1802.

Historical Development

1. Early Beginnings: Securities trading started informally among brokers and traders.
2. Establishment in 1802: Formally constituted as the London Stock Exchange.
3. 1973 Amalgamation: Combined various regional markets to become The Stock Exchange of Great Britain and Ireland.
4. 1986 Big Bang: Key reforms led to significant structural changes and the rebranding to the International Stock Exchange of the UK and Republic of Ireland Ltd (ISE).
5. Modernization: Subsequent changes included the shift towards automated trading with the Stock Exchange Automated Quotations System.

Reforms of 1986 (Big Bang)

• Membership: Allowed banks, insurance companies, and overseas securities houses to become members and purchase member firms.
• Commissions: Abolished fixed scales, allowing commission negotiation.
• Roles & Functions: Abolished the distinction between jobbers and brokers, enabling member firms to deal directly with the public, buy and sell shares for their own accounts, and act as market makers.
• Automated Trading: Introduction of the Stock Exchange Automated Quotations System.

Core Business Areas

1. Equity Markets
   • Main Market: For listed companies.
   • Alternative Investment Market (AIM): For unlisted securities.
2. Trading Services
   • Platforms for global broking firms to trade securities.
3. Market Information
   • Price and news provisions.
4. Derivatives
   • Created EDX London (now integrated with Turquoise) for derivatives trading.

Examples

• Company Listing: A corporation listing its shares on the LSE to raise capital.
• Market Maker: A firm that quotes both a buy and a sell price in a financial instrument, hence providing liquidity.
• Automated Trading: Use of LSE’s electronic trading platform for efficient and quick buy/sell transactions.

Frequently Asked Questions (FAQs)

What is the London Stock Exchange?

The London Stock Exchange (LSE) is a leading international financial securities market dealing in shares, bonds, derivatives, and other financial instruments.

When did the London Stock Exchange officially form?

The LSE was formally constituted in 1802, although the trading of securities began in London as early as the seventeenth century.

What was the ‘Big Bang’ of 1986?

The ‘Big Bang’ refers to crucial reforms in 1986 that modernized the LSE, allowing new types of firms to become members, abolishing fixed commission scales, and implementing computerized trading.

What are the main services provided by the LSE?

The LSE provides equity markets, trading services, market information, and derivatives trading.

How can companies list on the LSE?

Companies can list on the LSE’s Main Market for established firms or the Alternative Investment Market (AIM) designed for smaller or unlisted firms.

Related Terms with Definitions

• Big Bang 1986: A set of reforms that deregulated financial markets, allowing new entrants and electronic trading.
• Market Makers: Firms that provide liquidity by being ready to buy and sell securities.
• Stock Exchange Automated Quotations System (SEAQ): A computerized system introduced by the LSE for quoting trading prices.
• Main Market: LSE’s primary market segment for trading in listed companies.
• Alternative Investment Market (AIM): A sub-market of the LSE designed for smaller, growing companies.
• Turquoise: A European electronic trading platform part-owned by the LSE.

Online Resources

• Official LSE Website: Offers a wealth of information including educational materials for investors, rules for companies, and trading details.

Suggested Books for Further Studies

• “The London Stock Exchange: A History” by Ranald Michie
  • A comprehensive history covering the LSE’s developments and role in the global economy.
• “Financial Markets and Institutions: A Modern Perspective” by Anthony Saunders and Marcia Millon Cornett
  • A textbook providing an overview of financial markets, including the functioning of stock exchanges.
• “The Essentials of Trading: From the Basics to Building a Winning Strategy” by John Forman
  • Detailed guide on trading principles and strategies.

London Stock Exchange Fundamentals Quiz

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