This article will explain everything you want to know about the London Stock Exchange (LSE) in the modern-day. Please read the history of the London Stock Exchange to learn about how it formed and how the original London Stock Exchange worked.
What is the London Stock Exchange?
The London Stock Exchange is a company, whose shares are themselves listed on the London Stock Exchange. It’s a private enterprise and not an arm of government or industry body.
The role of the London Stock Exchange is to provide a place where investors can trade shares with other investors.
To keep the marketplace working in an orderly manner, the exchange doesn’t allow members of the public to interact with each other. Instead, UK stockbrokers execute the trades as intermediaries on behalf of their clients.
How to trade on the London Stock Exchange
As a retail investor, you cannot directly deal with the London Stock Exchange, you must open an account with a UK broker and place trades via their interface. Here are the top stockbrokers for share dealing in the UK:
Buy and sell funds at nil cost with Fidelity International, plus simple £10 trading fees for stocks & shares and ETFs.
Capital is at risk
Trade stocks & options on the advanced yet low-cost Freedom24 platform that arms retail investors with the tools to trade like professionals.
Capital is at risk
What is the value of all companies listed on the London Stock Exchange?
The total market capitalisation of all firms listed on the London Stock Exchange is £3,994,000,000,000 (£3.9 trillion).
This compares to the total market cap of the New York Stock Exchange ($27.6 trillion or £20.3 trillion) and the Hong Kong Stock Exchange which has a total market cap of $6 trillion or £4.4 trillion.
What volume of financial instruments are traded daily on the LSE?
On an average business day, approx. £6 billion of financial instruments change hands on the London Stock Exchange, although this can vary dramatically during periods of economic uncertainty.
What are the trading hours of the LSE?
Stockbrokers may only trade on the London Stock Exchange between 8 am and 4:30 pm, Monday – Friday, with the exception of bank holidays where the market is closed.
Why isn’t the London Stock Exchange open 24/7 or 24/6?
Given that the LSE order book is digital and trades are executed automatically through trading platforms, one may wonder why the London Stock Exchange continues to operate during limited working hours.
There are two good reasons why the LSE (and other leading stock exchanges) have not expanded their hours of operation since becoming a completely digital platform.
1. Stockbrokers, day traders and other market participants need a life
Day traders, swing traders and other stock market professionals generally need to be at their desks for every hour that the market is open.
This allows them to monitor their open positions and gives them the option to close their position early if new information or market moves indicate that it would be wise to do so.
A 24/7 stock market would fundamentally break this model. Day traders would either need to be ‘always online’ or would need to share responsibilities with other traders in ‘shifts’, handing over trades every 8 hours or so. This would dramatically increase the cost of trading, as more labour would be needed to manage the same positions over the same time period.
2. Constraining trade to a narrow band of hours results in deeper liquidity
A 24/7 London Stock Exchange might sound like an excellent development for participants. The most obvious advantage would be convenience: retail investors could place live market trades at a time which is convenient to them.
However, on balance, the move from a 42.5 hour week to a 168-hour market would undoubtedly reduce the efficiency of the London Stock Exchange. It would result in worse prices, volatile price movements and a reduction in the market’s ability to absorb large orders.
This may not feel like an intuitive result. We’ll use the following analogy to explain why this would be the case:
Imagine if share trades were conducted in a physical auction house in the heart of London for a single hour each day.
Prospective buyers pour into the room and sit down with a clear idea of the maximum price that they are prepared to pay for a share.
At the front of the room, a line of shareholders wait to take the stage and try to tell their shares, with different reserve prices reflecting the their willingness to sell.
With 300 people in the room, a lively session is guaranteed. As long as the highest buy offer in the room is greater than the lowest reserve price, trades will happen. Crucially, if a shareholder arrives with an enormous quantity of shares to sell, there will be ample cash in the room to take those shares of their hands for a reasonable price.
Now imagine how this would pan out if the auction was spread out across a 24 hour period.
The broad opening hours means that only 10 buyers sit down to bid for the current hour session. Only 7 sellers queue up at the front – representing a fairly small total quantity of shares.
The lack of participants on either side of this auction will stifle the market in a number of ways:
- Little overlap in the buy and sell price expectations of each side, could result in no successful trades occurring.
- There are too few participants to absorb a massive buy or sell order, even with flexibility on price.
- The market price could move dramatically from session to session given the very different combination of buyers and sellers that could turn up each time.
How the LSE works (simplified)
As a retail investor, to trade shares you will:
- Find the financial instrument you want to buy or sell
- Insert the total value or number of instruments you want to trade
- View the live quote generated by your stockbroker
- Accept the price by clicking ‘confirm’ or ‘execute’ on the trade summary
- That’s it! The trade will now take place.
What is actually happening behind the scenes, and how is the London Stock Exchange involved in the process?
There are a number of intermediaries which complicate the process of how shares are traded on the London Stock Exchange. These include market makers, also known as retail service providers or ‘stock jobbers’.
In this explanation, we will simplify the process by ignoring these parties. When financial institutions place large buy or sell orders, their trades also bypass market makers, so we will effectively describe how a large orders of this nature takes place:
There are three stages to a complete a trade:
Execution is the near-instant process of buy and sell orders being matched for a given quantity and price. This stage occurs moments after a trader clicks ‘place order’ at their terminal.
Execution at the live market price:
If a client instructs a stockbroker to buy 1,000 shares of BP plc at the live market price.
- The stockbroker automatically reviews the active sell orders on the exchange
- Starting with the lowest price first, will accept as many of these offers as needed until 1,000 shares have been bought.
Execution above/below the current market price using a limit order
If a client instructs a stockbroker to buy 500 shares of Domino’s Pizza Group plc at £3.45 (below the market price):
- The stockbroker will enter this buy order into the order book and wait.
- If the market price drifts downward following high selling volumes, this order may be eventually accepted by a stockbroker looking to sell.
- Large selling volumes cause the market price to drift downward because earlier sales will ‘use up’ the highest prices first and if these are quickly exhausted, stockbrokers will only have lower sell prices to match further orders against.
- This will result in the execution of the trade at the behest of the seller, at an unknown time in the future.
- If the market price never reaches as low as £3.45, then the buy order may never represent the best buy price offered and may never be accepted by a stockbroker on the sell-side.
Clearing is the process of both parties to the deal arranging for payment and transfer of the ownership of shares by an agreed date. When trading via the LSE, clearing and settlement must take place within 2 business days. This is known as ‘T+2’, and has been in effect since 2014.
While clearing can take place bilaterally, i.e. through correspondence between the stockbrokers involved, it is highly efficient to use a third party, known as a clearinghouse to carry this out. This is called centralised clearing.
The advantage of using a clearinghouse is that the clearinghouse will assume the risk of things going wrong, and will effectively guarantee the desired outcome of the trade to both parties. In turn, the clearinghouse will impose rules and restrictions on the stockbrokers to ensure that they uphold their end of the deal. This may include depositing a cash sum with the clearinghouse as security to hold.
Given that the two opposing stockbrokers may not know or trust one another, it is highly efficient to deal through a third party who can provide assurance to each party that the other will honour the deal struck.
The London Stock Exchange owns a majority stake in a clearinghouse called LCH.Clearnet which is one of the leading clearinghouses. Stockbrokers are not required to use LCH to clear trades placed on the LSE.
In layman terms, using centralised clearing is like using an escrow process to transfer ownership of a property. While each side to the transaction may not trust each other to honour their obligations, they do trust that the escrow agent will not release the property to the buyer until it has secured the buyer’s cash to be able to pass to the seller.
Settlement is the final part of the process of trading shares with the London Stock Exchange.
This is the point at which the ownership of shares is legally transferred from seller to buyer, and cash is transferred from buyer to seller.
Retail investors usually own shares through nominee accounts with an online brokerage. In this scenario, the new registered owner of the shares will be the buyers’ stockbroker. The stockbroker’s internal systems will hold the information that assigns those shares to the client’s own account.