The heated debate over the contraction of the London stock market has identified a number of possible causes. Blame for the precipitous decline in the number of listed companies has been placed on everything from the UK’s overly onerous corporate governance rules to the relentlessly negative financial media.
But two things really matter: valuation and liquidity. Many companies that turn away from listing in London say it’s because their shares are more expensive and traded elsewhere, usually in New York.
The London Stock Exchange and its supporters are seeking to refute these claims. LSE Group boss David Schwimmer insists it is a “myth” that UK-listed companies enjoy discounted valuations compared to US-listed companies. But few seem to be convinced.
Skeptics point to the fact that the US market’s earnings multiple is more than 40% higher than the UK’s. However, as I recently pointed out, when UBS did a strictly apples-to-apples comparison of individual stocks, it found that in about 40% of cases there was no discount, or even a small premium, for UK companies.
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Key liquidity figures look even worse in London. Although trading volumes on the LSE have fallen sharply in recent years, the numbers commonly quoted for US exchanges look much healthier.
However, all these statistics should be treated with caution. If you look at the Bloomberg or Refinitiv terminals, London’s stock volume figures only relate to trades made on his LSE. However, the figures cited for the US and EU countries include trades made on platforms other than major exchanges.
LSE tried to make this point in a blog post published last summer. Tom Stenhouse, head of equity trading products at the LSE, compared the total volume across all platforms in the UK and US to the float of company shares. This makes the situation very different. The FTSE 100 and FTSE All Share are slightly above the S&P 500 and Nasdaq 100, and the FTSE 250 is slightly below.
But Stenhouse added a caveat that fatally undermined his argument. A portion of the trading volume that takes place outside of major exchanges includes “non-addressable liquidity,” or trades that are not open to all market participants and “do not contribute to price discovery.” ing.
The market structures in London and New York are very different, so we cannot expect them to have the same proportion of non-addressable liquidity. However, this is not reflected in the total volume figure and may therefore be a poor indicator of effective liquidity.
Regardless of what the numbers show, many companies believe New York has much better liquidity.
Kaspi, a Kazakhstan-based fintech company that went public in London in 2020, recently raised $1 billion through a Nasdaq share offering. Caspi said the New York exchange offers higher valuations and better liquidity than the London exchange. Feedback from investors was that liquidity in London is a real issue. Low trading volumes mean it takes too long to build up large holdings. Some companies were forced to sell as the company’s share price has tripled since its listing, meaning it violated fund regulations regarding illiquid holdings.
But one veteran equity banker suspects that liquidity is a serious problem for most London-listed companies. He admits that data for different markets is difficult to find and difficult to interpret, but when he crunched the numbers he found there was a rational basis for the LSE.
read “The lazy analogy that New York is the right market for everyone is wrong.”
So why hasn’t the LSE been better able to counter liquidity demands?
Probably because you can’t quite decide what line to take. Should we say, “Liquidity is terrible, we need help” and do it? Or should we say, “Look at the numbers, liquidity is fine”?
If the LSE decides it needs to seek help, the obvious way for the government to help it is by reducing the 0.5% stamp duty on share purchases. This tax makes the UK a less attractive venue, particularly for high-frequency traders, who have recently become an important provider of liquidity.
However, it raises around £4bn a year. The LSE will therefore need a very convincing argument that reducing the levy is a good use of public funds.
On the other hand, if the LSE wants to argue that liquidity is fine, it needs to do a better job with its data. The introduction of a unified tape recording all transactions would help, but we cannot wait for that. We should now call on the Financial Conduct Authority to improve reporting from all trading venues.
In terms of manageable liquidity, the LSE needs to create a more convincing comparison between London and New York as soon as possible. If this is very important to you, you should level it up.
To contact the author of this article with feedback or news, email David Wighton