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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a Conservative MP and former City minister and chief secretary to the Treasury
Ensuring the liquidity of the stock market and keeping the City of London’s reputation intact are not just laudable aims, they are mission critical when it comes to building the future profile of the UK economy and, with it, the country’s place on the world stage.
Concerns have been growing that London is losing its competitive edge on listings while other financial centres gain ground. The Financial Times reported last week that London Stock Exchange had suffered its worst year for listings in 28 years, with only seven companies floating so far compared with 231 in the US. And that came after a difficult 2024 in which London suffered its biggest net outflow of listings since the financial crisis. There are hopes of a pick-up over the next year from private equity groups but a gap with the US is expected to persist.
Liquidity is at the heart of the problem, with greater trading depth in US markets often cited as a key factor in preferring the US for listings. Policymakers need to take steps to fix it. During my stint as City minister, my overarching goal was to strengthen the UK’s financial services industry. In the simplest terms, ease of trading lowers the cost to business of raising money and stimulates investment. I worked to make London more attractive to global investors, in large part by strenuously resisting the addition of new costs and frictions in the trading systems and regulatory environment.
To advance these aims, the government I served in launched several initiatives, including the review of listings by Lord Hill and another led by Mark Austin scrutinising the obstacles to and facilitators of secondary capital raising. The City actively engaged with the work, helping to produce recommendations, some of which are only now coming into effect.
Despite these efforts, the number of shares being actively traded is still in decline, fuelled by changing trading methods. When I was appointed economic secretary to the Treasury in January 2018, nearly half of trades took place via public exchanges known as “lit” venues, where prices and flows of activity are clearly visible. By June this year, that number had dropped to just 25 per cent, excluding end-of-day auctions (19.7 per cent).
More trades now happen in “dark’” or over-the-counter transactions, which are harder to track. And periodic auctions — another form of selling shares that is considered to have less pre-trade transparency than traditional public transactions — have surged from 0.5 to 5.2 per cent of trades, a nearly 900 per cent increase in seven years.
This shift is not unique to the UK, it is a trend across Europe. But it is undeniable that the UK has led the way and now holds the unenviable position of being the stock exchange with the lowest level of public trading relative to overall trades in Europe.
The problem is compounded by the rise of financial tools such as equity swaps, typically allowing two parties to exchange financial obligations free from stamp duty or the duty of public reporting.
So where do policymakers come in? I realise that some of this delves quite deep into the mechanics of how markets work — but the challenge for government is surprisingly clear. Frankly, the fact that only 15 per cent of share trades on the LSE (on and off its public order book) attract stamp duty should be enough of an attention-grabber for the Treasury in and of itself. Are the incentives in the right places?
But, beyond that, if would-be retail investors cannot see who is investing in what and why, the market becomes less efficient. In a robust and healthy open market, as many trades as possible should be visible so that everyone is able to make informed decisions and invest with conviction.
One solution would be a post-trade consolidated “tape” recording of transactions that data providers should make mandatory. The Financial Conduct Authority is now consulting on a framework for this and has issued a tender to provide such service. It is important to make this robust. We need to make transfers of economic interest reportable so that the “dark” transactions are disclosed, making trading more transparent, improving the market’s view of liquidity.
The long-standing reputation of the City of London is far from a busted flush. It is a solid foundation of trust on which to build. Where ignorance of the market’s activity insidiously breeds caution, increasing transparency has the power to rapidly restore confidence, encourage higher volume smarter investing, and re-energise London share trading in the eyes of the world.