7.) The London Stock Exchange Flashcards
Define the acronym LSE
London Stock Exchange
Define and briefly describe the different categories of financial instruments traded on the LSE
REMEMBER - the 3 types of INSTRUMENTS traded on the LSE
Debt instruments - have a defined life, final maturity date and agreed terms of interest to the investor, e.g. bonds and commercial paper
Equity instruments - grant an investor a specified share of ownership and rights to a proportionate amount of declared dividend, e.g. ordinary and preference shares
Hybrid instruments - include many features of both debt and equity instruments, e.g. convertible loan stock
Note that, from an investor’s point of view, debt is less risky than equity because if the borrower goes into liquidation, investors holding debt instruments will be repaid BEFORE shareholders
Define who on the London Stock Exchange (LSE) matches the needs of borrowers (sellers) with investors (buyers)
Intermediaries, such as brokers and merchant banks
Define the characteristics of debt instruments, one of the different categories of financial instruments traded on the LSE
Debt instruments have a defined life, final maturity date and agreed terms of interest to the investor, e.g. bonds and commercial paper
Define the characteristics of equity instruments, one of the different categories of financial instruments traded on the LSE
Equity instruments grant an investor a specified share of ownership and rights to a proportionate amount of declared dividend, e.g. ordinary and preference shares
Define the characteristics of hybrid instruments, one of the different categories of financial instruments traded on the LSE
Hybrid instruments include many features of both debt and equity instruments, e.g. convertible loan stock
Define and briefly describe a primary market, in terms of the LSE
A primary market is one that raises new capital for companies by issuing shares and bonds, and raises new capital for governments by issuing gilts.
E.g. If company X wants to raise capital for the first time, it would do so via seeking an initial public offering in the LSE’s primary market.
A primary market is essential in tracing new shares that are open to the market for the first time
Define and briefly describe a secondary market, in terms of the LSE
A secondary market is one that deals with stocks and shares that have already been issued
Any subsequent sales and purchases of company X shares (after their initial public offering on the LSE’s primary market) would take place on the secondary market
The secondary market is essential for trading existing shares between new buyers and sellers
Describe the difference between the primary and secondary markets of the LSE
A primary market is one that raises new capital for companies by issuing shares and bonds, and raises new capital for governments by issuing gilts.
A secondary market is one that deals with stocks and shares that have already been issued
E.g. If company X wants to raise capital for the first time, it would do so via seeking an initial public offering in the LSE’s primary market. Any subsequent sales and purchases of company X shares would take place on the secondary market
A primary market is essential in tracing new shares that are open to the market for the first time
The secondary market is essential for trading existing shares between new buyers and sellers
Define when the ‘Big Bang’ changes occurred at the LSE
27 October 1986
Define the ‘Big Bang’ changes at the LSE, and the key changes that it included
On 27 October 1986, significant changes occurred at the LSE which became known as the ‘Big Bang’, which prompted fundamental revolution in the way in which the London Stock Exchange operated, including:
Traditional floor planning was replaced by screen based trading
Membership restrictions were lifted, with membership opening up to outsiders
Companies were permitted to trade Dual Capacity - they could act as both Principal (buying and selling stocks for themselves) and as Agent (buying and selling stocks for others)
The abolition of fixed minimum dealing commissions, to be replaced by freely negotiated commissions
Define the types of functions and roles that began to emerge as a result of Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
Market Makers
Dealers
Agency Brokers
Inter-Dealer Brokers and Stock Exchange Money Brokers
Define Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
As a result of the ‘Big Bang’, companies were permitted to trade Dual Capacity - that is, companies could now act as both Principal (buying and selling stocks for themselves) and as Agent (buying and selling stocks for others)
Define the function and role of a Market Maker, in terms of being one of the roles that began to emerge as a result of Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
Market Makers can be regarded as the wholesaler of shares. They own shares in their own right and quote prices for buying and selling so that investors who deal directly with them can know exactly what the buying and selling prices for a particular share are.
The prices quoted by the market makers are available to see via SEAQ screens
Define the function and role of Dealers, in terms of being one of the roles that began to emerge as a result of Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
Not all companies wish to act in a Dual Capacity (I.e. as both Principal and Agent). As principals, they will buy and sell shares on their own account, quoting a two-way price. Or, they may choose to act as only agency brokers.
Define the function and role of Agency Brokers, in terms of being one of the roles that began to emerge as a result of Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
Company chooses to perform a pure agency function, whereby they act ad intermediaries between investors and market makers.
They will look up prices on the SEAQ screen and deal with the market makers offering the best price
Define the function and roles of Inter-Dealer Brokers and Stock Exchange Money Brokers, in terms of being two of the roles that began to emerge as a result of Dual Capacity trading systems, a change brought about by the LSE’s ‘Big Bang’ series of changes
Their main function is to ensure adequate liquidity of stocks and shares in the market by offering to lend stock to the markets.
Define and briefly describe the London Stock Exchange, and the types of borrowers who use it
The London Stock Exchange (LSE) is a capital market, as it provides a means for borrowers to raise capital, at a price, from investors who have money available.
Borrowers range from:
Large international companies
Governments
Banks
Define liquidity
The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Define stock exchange
A market in which securities are bought and sold
Define securities
A security is a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.
Define the two ways in which the LSE is regulated and supervised
Self-assessment by the LSE itself
Legislation and external regulation
Describe how the LSE is regulated and supervised via self-assessment
The LSE has its own regulations, to which member firms must abide.
The Council of the Stock Exchange can enforce disciplinary proceedings against firms that do not adhere to its standards.
Stock Exchange member firms undergo rigorous admission procedures, which includes employees obtaining specific qualifications showing competency in a number of areas, as prescribed by the LSE
Describe how the LSE is regulated and supervised via legislation and external regulation
The Financial Services and Markets Act 2000 governs all trades executed on the LSE. This legislation covers all aspects of the financial industry, both investments and banking, and is overseen by the Financial Conduct Authority (FCA), who is the sole regulator
The LSE is a Recognised Investment Exchange (RIE)
Investors who lose money as a result of fraudulent activity or negligent advice given by a Stock Exchange member firm will receive compensation, up to a maximum of £48,000. This is broken down as 100% of the first £30,000, and 90% of the next £20,000
Define the acronym RIE
Recognised Investment Exchange
Define the ‘correct’ name for the LSE
The International Stock Exchange of the United Kingdom and Republic of Ireland Limited
Describe the dealing process for buying/selling stocks or shares on the LSE
For a private investor wishing to buy or sell stocks and shares, their first point of call would be via their agency broker. The broker would require specific info as to whether the investor wanted to:
Buy or sell shares
What shares they are looking to buy/sell
The amount of the investment
Whether the deal is to be executed at the best price possible or whether it is a limit order
Should the instructions to the broker be a buy deal, the broker would consult his SEAQ screen and telephone a market maker showing the best quote. Once the deal is agreed, the investor becomes the owner of the shares and the broker will forward a contract note with full details of the deal. The contact note will act as evidence until receipt of the Share Certificate by the investor
Define limit order
A limit on the price of the shares above which a purchaser mustn’t be made, and below which a sale mustn’t be carried out
Define the six different trading systems operating within the LSE
SEAQ - Stock Exchange Automated Quotation System (Domestic Stocks)
SEAQ International - Stock Exchange Automated Quotation System (International stocks)
SAEF - Stock Exchange Automatic Execution Facility
SEATS PLUS - Stock Exchange Automated Trading Service
SETS - Stock Exchange Electronic Trading Service
CREST - Certificate-less Register of Electronic Stocks and Shares Transfer
Define SEAQ, in terms of being one of the trading systems operating within the LSE
Stock Exchange Automated Quotation System (Domestic Stocks)
A screen-based, quote driven system used for trading middle-ranking domestic (UK) stocks
The system acts as an electronic price list, displaying market makers two-way quotas to the market, therefore keeping both market makers and agency brokers up to date with the security prices on offer, in order to obtain the best possible price for their clients
SEAQ also provides an audit trail to check for suspicious price movements that could indicate insider dealing or other fraudulent activity
Define SEAQ International, in terms of being one of the trading systems operating within the LSE
Stock Exchange Automated Quotation System (International stocks)
SEAQ International provides market price information for the leading international stocks from many countries
Define SAEF, in terms of being one of the trading systems operating within the LSE
Stock Exchange Automatic Execution Facility
SAEF enables member firms to enter buy and sell orders and then automatically match them against the best quotas held in SEAQ (Stock Exchange Automated Quotation System)
For the broker/dealer, SAEF enables them to place smaller orders without them having to engage with a market maker, thus speeding up the transaction
Define SEATS PLUS, in terms of being one of the trading systems operating within the LSE
Stock Exchange Automated Trading Service
SEATS PLUS trades shares, which are dealt infrequently and in low volumes, plus shares, which are quoted on the Alternative Investment Market (AIM)
Define what the acronym AIM stands for
Alternative Investment Market
Define SETS, in terms of being one of the trading systems operating within the LSE
Stock Exchange Electronic Trading Service
SETS is the central trading system for blue chip securities comprising the FTSE 100, and FTSE 100 Reserve (those companies recently removed from the FTSE 100)
Settlement time is T+3, with no minimum order size
Define the bid offer spread
The difference between the buying or selling price (of a share) plus speed of execution
Define how the trading system SETS works, in terms of being one of the trading systems operating within the LSE
It is an order-driven system, where orders to buy or sell shares are matched automatically by computers. This system removes the market maker and therefore investors should benefit from a reduction in the bid offer spread, I.e. The difference between the buying or selling price (of a share) plus speed of execution should be quicker
Once an order has been placed in the order book, it will be automatically matched against a corresponding order. If there’s no corresponding order to match against, it will simply stay on the order book until it’s matched or it will be returned, in part or full, to the member who entered it into the system originally. The system is totally anonymous: there is a Ventral Counterparty Service that acts as seller to each buyer, and as buyer to each seller
Settlement time is T+3, with no minimum order size
Define T+3, in terms of settlement time
Investors must settle their security transactions in three business days. This settlement cycle is known as “T+3” — trade date plus three days
This rule means that when you buy securities, the brokerage firm must receive your payment no later than three business days after the trade is executed
T+3 is the standard settlement time for UK equities and corporate bonds held within SETS and CREST, and is referred to as a Rolling Settlement.
All monies/share certificates must be received and remitted by brokers within this time span
Define the 4 main types of buy and sell orders/SETS order types
(Remember ‘Patrick Bateman’ for types of buy and sell orders/SETS order types)
At best order
Limit Order
Fill or Kill
Execute or Eliminate
Define and describe the SETS order/buy and sell order type known as ‘At best’ order
Only specifies the volume of shares to be traded, it doesn’t specify a price
An at best order requests that the requested volume of shares be executed at the best price available on the order book
This being the highest buy price on the Oder book from a seller’s perspective and the lowest sell price on the order book from a buyers perspective
An at best order will execute, in full or in part, against eligible orders in the order book. Any unmatched order will be rejected from the system
Define and describe the SETS order/buy and sell order type known as ‘Limit’ order
Specifies the volume of shares to be traded and a limit price, I.e. no worse than price.
Any unmatched order will remain on the order book for 90 days waiting to be matched, after this time it will be automatically deleted
Define and describe the SETS order/buy and sell order type known as ‘Fill or Kill’
Specifies the volume of shares to be traded, but a specified price is optional.
A fill or kill order can also be described as an ‘all or nothing’ order.
If the entire order cannot be executed at this price or better, the entire order is rejected.
Define and describe the SETS order/buy and sell order type known as ‘Execute and Eliminate’
Specifies a volume of shares and a limit price with the order to execute as much of the order as possible, up to a specified price.
Any unexpected part of the order is rejected from the order book
This order type can also be described as ‘do what you can and reject the rest’
Define CREST, in terms of being one of the trading systems operating within the LSE
CREST is the settlement system used for UK equities
CREST is owned by a company called CRESTco Ltd
Investors are able to hold their securities in dematerialised form, I.e. no share certificates will be issued or in certified (paper) form
Define how the trading system CREST works, in terms of being one of the trading systems operating within the LSE
Once a deal has been executed, the transaction must then be settled, which is the process of finalising payment and delivery of the security. This is the point at which legal title changes due to a change in ownership.
The standard settlement time for UK equities and corporate bonds held within CREST (and SETS) is T+3, also known as a rolling settlement. All monies/share certificates must be received and remitted by brokers within this time span
Define and briefly describe some of the different functions of CREST
Maintaining a record of all its members eligible stock holdings
Responding to members requests to transfer stock from one CREST account to another
Authenticating instructions received against member accounts
Moving stock and cash from sellers account to the buyers account
Notifying the stocks registrar within 2 hours of the transfer in the system
Define and briefly describe some of the different participants operating within CREST
Regulators and tax authorities - FCA has access to CREST to enable it to perform its regulator oversight, whilst the tax authorities have access to collect any tax due, I.e. stamp duty where applicable
Payment banks - require access to settle the cash element of the transactions
Registrars - require access to update company registers with new owners
Member firms - hold shares in their own name within the CREST system
Define the 3 choices that shareholders/investors will have when undertaking a trade
Sponsored CREST membership
Nominee Account Arrangement
Continue to trade and receive share certificates
Define and describe sponsored CREST Membership, a choice that shareholders/investors will have when undertaking a trade
This will enable the shareholder to remain the legal owner of their shares and will allow them to deal electronically. There will be a fee for membership rights and usually minimum volume of trade dealings will apply
Define and describe Nominee Account Arrangement, a choice that shareholders/investors will have when undertaking a trade
Under a nominee account arrangement, shares would be registered in the name of a nominee company who would then hold the shares on behalf of the investor.
Legally, the nominee (the broker) would become the legal owner of the shares, and the investor would become the beneficial owner.
As the shareholding would be registered in the name of the nominee, any communication or rights accruing from the owning of shares will be attributed to the nominee, not the actual investor
Define and describe the code of conduct for operating nominee account services launched by Proshare, as it relates to Nominee Account Arrangement, a choice that shareholders/investors will have when undertaking a trade
In order to protect investors and provide for best practices, Proshare, a company promoting private share ownership, launched a code of conduct for operating nominee account services. Basic provisions of the code included:
All charges should be disclosed by the nominee
Nominees should supply a form by which clients can order hard copies of documents issued by companies in which they invest
Nominee will use its reasonable endeavours to claim shareholder perks on behalf of the client
Nominees must arrange for investors to attend and speak at AGMs, or proxy votes if they wish
Define and describe the choice to continue to trade and receive share certificates, a choice that shareholders/investors will have when undertaking a trade
Investors still have the choice as to whether they wish to receive share certificates (paper form) or whether they’re happy to accept the security of a dematerialised form
