London Stock Exchange, Principal Trading Systems and other Markets - Chapter 1

Question 1

What sort of company is the London Stock Exchange?

Answer 1

It is a FTSE 100 listed company owns and operates (through a subsidiary) a number of exchanges in the UK and also owns the Italian Stock Exchange, the FTSE index and MilleniumIT (a trading software provider) The London Stock Exchange plc is the subsidiary of the LSE Group

Question 2

Which UK markets does the LSE Group operate in?

Answer 2

1) Main Market for listed companies ‒ this is a ‘regulated market’ for the purposes of MiFID (markets in Financial Instruments Directive) that is divided into different segments for premium and standard listed companies; 1 a) High Growth Segment of the Main Market ‒ although this is part of the Main Market, (which is a regulated market), companies quoted on this segment are not admitted to the Official List (i.e. are not listed); 2) Professional Securities Market ‒ a specialist market for debt instruments; 3) Alternative Investment Market (AIM) ‒ a ‘junior’ market for unlisted companies 4) Turquoise (a multi-lateral trading facility)

Question 3

What is the main market of the London Stock Exchange?

Answer 3

IT is the main market for listed securities in the UK. It is a regulated market. Admission used to be just for listed companies but now it has two segments - premium and standard listed companies - and an unlisted segment for high growth companies (though there are no companies in this group yet!) Securities quoted on the main market still need to be admitted to listing by the FCA/UKLA (who have their own rules).

Question 4

What sort of document would companies seeking admission to the main market need to provide?

Answer 4

An approved PROSPECTUS approved by the FCA. I, lists information and future projections about the company Ii) states that they have sufficient working capital for the next 12 months. Nearly all companies seeking a listing in the UK choose to have their shares traded on the Main Market of the London Stock Exchange.

Question 5

What rules do the London Stock Exchange as that issuers comply by including fees if any?

Answer 5

a) LSE’s Admission and Disclosure Standards b) All relevant FCA rules c) admission fees to be paid to the LSE and annual fees thereafter (in addition to the listing fees payable to the UKLA) d) nominate individuals as the main point of contact for the LSE e) Comply with the LSE’s dividend and corporate action timetable f) disclose information to the LSE on request g) Authorise the LSE to suspend or cancel trading in a companies securities.

Question 6

Explain the High Growth segment of the main market?

Answer 6

This is for high performing but not yet ‘listed’ companies. They need to have £300-600 million with revenue growth of at least 20% over the previous three financial years. There are currently no issuers in this segment. These companies would not be subject to the listing rules as they are not listed companies but would still need to abide by EU Directives, including the Prospectus, Market Abuse and Transparency Directives. The high growth segment sits somewhere between premium and standard listed segments in terms of investor protection. Issuers are required to:  appoint a ‘key adviser’ in circumstances similar to those in which premium listed issuers must appoint a sponsor, e.g. for admission and when undertaking a major or related party transaction;  announce proposals to enter into a major or related party transaction, although like AIM companies shareholder approval is not required unless it is a reverse takeover;  announce certain events (such as board changes or changes to capital structure);  comply or explain against their national corporate governance code or another chosen code;  publish certain key documents on their website, including copies of its constitutional documents, most recent financial information and all RIS announcements made during the previous 12 months.

Question 7

What is TechMARK

Answer 7

The LSE launched TechMARK in 1999 in an attempt to compete with Nasdaq and meet the requirements of technology companies wishing to raise capital. TechMARK is not a seperate market but more like a segment of the Main Market with its own TechMARK index. In 2005 the LSE also launched TechMARK Medi-Science index for biotechnology companies.

Question 8

What is the Professional Securities Market?

Answer 8

It is a specialist market operated by the LSE that facilitates the raising of capital through debt securities to professional investors. It is a listed exchange-regulated market and enables issuers to enjoy the benefits of a flexible and pragmatic approach to regulatory requirements. The ULKA approves the listing and companies then apply to the Exchange for admission to trading.

Question 9

When was the BIG BANG and what were the consequences?

Answer 9

It was in 1986. Before this it was a cosy club with no competition. Consequences were:  Minimum Levels of Commission, which were abandoned in America in 1975, were abolished.  Dual capacity was introduced.  Market makers replaced jobbers.  Trading was conducted from dealing rooms and not on the floor of the exchange.  Electronic dealing systems were introduced.  Individual members were abolished and only corporate members could have a seat on the Exchange and a vote.  Overseas firms were allowed a seat on the Exchange and bought up old-established UK firms heralding the continuing globalisation in the financial services industry.  The London Stock Exchange became a listed company.

Question 10

Explain Single Capacity v Dual Capacity

Answer 10

Brokers (who deal with clients) and Jobbers (who buy and sell shares) were not allowed to do the same job (single capacity). The argument advanced against dual capacity was that an agent - whether broker or jobber - might mislead or offload dud stock onto a client, or create a false market in shares. Dual Capacity is what is used now where market makers and brokers can deal on their own account. If an investor wishes to unload a large block of shares the broker can buy them as principal, and gently off-load them rather than disturb the equilibrium of the market. They can therefore act in two capacities as both principal and agent. However, a number of institutions may cut out commissions by dealing directly with the market maker. Roughly one-half of all institutional business is now done on this basis. The market maker does not require a commission but takes a profit on the difference between buying and selling prices known as the market maker’s “touch” or “turn”. Market makers are exempt from stamp duty. Brokers registered as sales traders can be exempt from stamp duty

Question 11

What is SEAQ

Answer 11

It is the first electronic trading system which enabled the London Stock Exchange to dispense from dealing on the floor of the London Stock Exchange. It is now used only for a small number of specialist securities.

Question 12

Why do market makers change their price?

Answer 12

Money makers must register which securities they intend to make a market in. They then need to provide two way prices, the price they buy at and sell at. so A 50 - 54 B 49-53 C 51-55 so they will make £4. A broker would then sell shares through C at the higher price and buy shares through B at 53. However, a number of institutions may cut out commissions by dealing directly with the market maker. Roughly one-half of all institutional business is now done on this basis. The market maker does not require a commission but takes a profit on the difference between buying and selling prices known as the market maker’s “touch” or “turn”.

Question 13

Explain quotation driven systems?

Answer 13

Quotation driven systems rely on two-way quotes from market makers. Traders cannot buy and sell shares director from each other. SEAQ is an example of a quotation driven system. Fallen out of use, due to popularity of order matching systems. Not fully compliant with MiFID requirements.

Question 14

Explain order driven systems?

Answer 14

These allow members to input buy and sell orders which are then matched by the system. This results in a contract between the parties. Advantages are can reduce costs as buyers and sellers do not need to deal at prices quoted by market makers. Disadvantages are lack of immediacy. Under quote driven systems a price is agreed immediately. Unattractive orders will just sit on the screen. Snakes in the grass - this can happen if people put a price which is 20% below the market price and a broker may accidentally match it by offering to sell shares at that price. Then its automatically matched before the order can be erased. The FCA will punish snakes.

Question 15

What is Normal Market Size (nms)?

Answer 15

The Normal Market Size for a transaction lies in 12 bands ranging from 500-250,000 shares. Alpha shares have at least two market makers an an NMS of 2000 or more. Other shares are Beta shares. The NMS determines the dealing and reporting obligations of market makers who are obliged to deal at their quoted prices for any volume of shares up to the NMS. Other instruments such as warrants are Gamma securities.

Question 16

Explain SETS?

Answer 16

This is an order driven system. It stands for Stock Exchange Trading Service. Buy and sell orders are matched with each other automatically and executed electronically. Orders must be for a minimum amount. There is also a maximum order size (99 times normal market size). Smaller orders are executed outside the order book (eg with a retail service provider). Orders are prioritised by: a) best price b) within orders at the same price, oldest orders execute first (orders are time and date stamped) Once entered an order cannot be amended but it can be cancelled prior to execution and replaced. Fast Market Conditions - allows the LSE to halt dealings for 10 minutes if the price of a share moves by more than 10%.

Question 17

What types of orders are there for SETS?

Answer 17

a) Limit Orders - a person says they want 500 shares at £3. This will be immediately matched if possible but if not it will sit in a pending file possibly encouraging people to reduce their price to get the order b) At Best Orders - simply specify the number of shares only eg 5000 shares and they will go through on the best price available. This has a risk of Snakes in the Grass but this does constitute as Market Abuse so hopefully doesn’t happen too often. c) Fire or Kill Orders - a set price and amount of shares so 1 million shares for £3. If it can be matched it will be done immediately if not it will be immediately deleted. d) Execute and Eliminate Orders - similar to fire or kill but they can be executed in part with the unsatisfied remainder of the order deleted. e) Market Orders - where an unpriced block of shares is put up to auction for bids. Purchases bid what they wish to pay and the order is filled in stages. f) Executable quotes - For use of market makers that have registered in individual SETS securities to provide full visible, executable quotes. g) Deletion of Orders - Orders are automatically deleted if they have sat on screen for 30 days.

Question 18

What information is available on screen for traders?

Answer 18

1) Current price - the last deal done on the book 2) Last price - the last price whether done on the book or not 3) Average price 4) Buy Orders - The total number of shares wanted and an average price - if two buy orders appear on screen at the same price the one entered first will be matched. 5) Sell Orders - Gives the total number of shares for sale in price order together with an average price to sell the whole lot 6) Yellow Strip - Highlights the best buying and selling orders on offer

Question 19

What is SETSqx

Answer 19

Stock Exchange Electronic Trading Service - quotes and crosses - trading platform provided through Millennium Exchange for securities less liquid than those traded on SETS

Question 20

What is the Alternative Investment Market (AIM)

Answer 20

It is a junior market for unlisted companies operated by the LSE. It came into being in 1995 as the replacement for the Unlisted Securities Market. It is not a regulated market for MiFID purposes. Companies must comply with the AIM Rules for Companies. - this is a much lighter regime that smaller companies can comply with more easily. Companies are - not required to comply with listing rules - not subject to EU IAS regulation - not required to comply with any EU requirements - not required to publish a Prospectus Must still - appoint an adviser - make a simpler pre- admission announcement or if over £5m publish a prospectus securities must be freely transferable and required to be eligible for electronic settlement

Question 21

How do you seek admission to AIM?

Answer 21

1) appoint a nominated adviser at least 10 business days prior to admission 2) provide the exchange with certain information 3) make a formal application for admission at least 3 days prior to proposed admission date. Admission document includes: - details of company’s name and place if incorporation - brief description of business - the securities for which admission is sought - the names, functions and detailed histories of the directors - any substantial shareholders - company’s promoters, nominated advisers and brokers - working capital statement and risk warning to investors Admission document must be available on company’s website.

Question 22

What is a NOMAD

Answer 22

IT is a nominated adviser, from an approved register kept by the LSE. They must: complete the application process to bring a company to AIm Ensure AIM Rules are complied with Directors understand their obligations There are currently 60 firms authorised by the LSE to act as NOMADs. NOMADs can get fined for not checking the companies it brings to the market (Nabarro Wells). To its critics AIM is wasteland where investors are fleeced by fee hungry brokers who abuse the market by flogging unfit companies.

Question 23

What is a Cash Shell?

Answer 23

A company that has set up on AIM as a Cash Shell which take investors money with no more than a vague promise that the directors will invest the money when suitable opportunity arises. The directors continue to receive their remuneration on the basis that they are seeking an opportunity.

Question 24

What are the corporate governance guidelines for AIM Companies?

Answer 24

They are not required to have any sort of corporate governance statement in their accounts although some choose to do so voluntarily. The Quoted Companies Alliance (QCA) publish guidance on corporate governance for smaller companies including AIM companies. It provides: 1) there should be a formal schedule of matters reserved for the board 2) the board should be supplied with information in a timely manner to enable it to discharge its duties 3. The role of chief executive and chairman should be separate 4. There should be at least two non-executive directors 5. All directors should stand for re-election at regular intervals 6. Audit, Remuneration and nomination committees should be established 7. The board should take responsibility for dialogue with shareholders Terms of reference of the committees and the contract terms for non-execs should be published on the company website.

Question 25

What is the ISDX and the ISDX Growth Market?

Answer 25

ICAP Securities and Derivatives Exchange (ISDX) is a UK RIE which operates two markets previously operated under the Plus Market brand and prior to that as Ofex. It competes with the LSE. The ISDX Growth Market is a market for unlisted securities. To join the ISDX Growth Market companies a) appoint and retain a corporate adviser at all times b) demonstrate appropriate levels of corporate governance, including one non-exec director c) publish audited financial reports no more than nine months prior to the date of admission to trading. d) have at least 12 months working capital e) no restrictions on the transferability of shares f) issue shares which are eligible for electronic settlement ISDX Growth Market is regulated by the FCA and is one tier below AIM.

Question 26

Overseas Markets - Explain NASDAQ

Answer 26

This is a US market and a listed company in its own right. It competes with the NYSE. NASDAQ was the worlds first electronic stock market. Over the years it has become more of a stock market. To qualify for a listing on NASDAQ you must be registered with the United States Securities and Exchange Commission (SEC), have at least three market makers, and meet minimum requirements for assets capital, public shares and shareholders. It is the venue of choice for technology stock such as Microsoft, Google, Apple, Amazon. However trading is not limited to technology (eg Starbucks). In 2006 Nasdaq bought a 31%share in the LSE and made an unsuccessful takeover bid for it. In 2007 it sold most of its stake.

Question 27

Overseas Markets - Explain the NYSE

Answer 27

The NYSE is the largest stock exchange in the world and serves as the main venue for UK companies seeking a US listing. It is located on Wall Street. Average daily trading 169 billion. Can be traded on the floor or electronically via a hybrid system.

Question 28

What is a multilateral trading facility?

Answer 28

MiFID changed the rules to allow financial instruments to trade not only on stock exchanges but on any multilateral trading facility and to get the best price for their client.

Can deal in shares which have been admitted to trading on a regulated market such as the LSE but also to establish a market in unlisted shares.

For eg, the lSE operates the London stock exchange for trading listed company shares, but also AIM as an MTF for smaller companies and Turquise as an MTF for trading shares listed on other regulated markets.

Some MTFs operate a lit (with pre-trade transparency) and dark markett (with no pre-trade transparency)

Question 29

What is a Brokers Crossing Network

Answer 29

Most large investment firms run their own Brokers Crossing Networks.

Clients buy and sell orders are matched internally either against eachother or against its own book.

BCN’s operate outside MIFID framework.

MiFID II is expected to include changes which are intended to restrict the way BCNs may
operate. It is estimated that only 4% of trades are processed through BCNs.

Question 30

WHAT ARE THE LPTD RULES

Answer 30

The LPTD rules are issued by the FCA as the competent authority for listing in the UK.

The LPTD rules include:

 the Listing Rules (LR);
 the Prospectus Rules (PR);
 the Disclosure and Transparency Rules (DTR).

Question 31

Explain the two tier listing regime?

Answer 31

There are two segments of the main LSE market:

• premium segment - with more stringent UK standards
• standard segment - to which only EU minimum standards apply

Both UK and overseas companies can apply for either listing and can transfer from one to another.

The additional Listing Principes they have to meet are:

Continuing obligations

Significant transactions

Related party transactions

dealing in own securities and treasury shares

contents of circulars

Question 32

What do the listing principles state?

Answer 32

Listing Principles are designed to help issuers know their objlications and enable the FCA to monitor those rules. Principes state that:

1. Companies must take all reasonable steps to ensure that their directors understand
   their obligations under the Listing Rules.
2. Proper procedures must be in place to ensure compliance with the Listing Rules.
3. Companies must act with integrity towards actual and prospective shareholders.
4. Shareholder communications must be made in a clear and timely manner.
5. Shareholders of the same class must be treated equally.
6. Companies must deal with the UKLA in an open and co-operative manner.

Currently these are just for Premium listings but the FCA is considering extending this.

Question 33

What Continuing Obligations do the Listing Rules and Disclosure and Transparency Rules state are required?

Answer 33

Some of the initial requirements are repeated.

The rest are disclosure obligations

The overriding objective of the continuing obligations is to secure the prompt and orderly
release of information which might affect the market in a company’s shares.

Question 34

Do listed companies need to announce regulatory information and through what body?

Answer 34

Announce through the Regulatory Information Service (RIS).

Need to forward electronic copies of documents to the National Storage Mechamism including prospectuses, annual accounts and AGM notices

Announcements published by RIS providers (eg RNS) are widely distributed to news services.

The following must be announced:

 Inside information (price sensitive information) which may lead to price changes such
as a takeover approach, new spheres of activity, an inability to meet outstanding debts,
a fall in revenues or a profits warning (DTR 2).
 Dealings by directors and PDMRs in listed securities (and their connected persons)
(DTR 3)
 Annual financial report, preliminary and half-yearly results, interim management
statements (soon to abolished) and dividends (DTR 4 and LR 9.8);
 Details of major (3%+) shareholdings notified to the company and a monthly total
voting rights statements (DTR 5).
 Proposals to change the company’s capital structure or to redeem securities, and
details of any purchases which take place.
 Alterations to shareholders’ rights in relation to securities.
 The basis of allotments offered to the public before dealings commence because
applications may have been scaled down or balloted out.
 Board changes (LR 9.6).
31
 Disposals of equity shares under lock-up arrangements (LR 9.6);
 Change of name (LR 9.6);
 Change of accounting reference date (LR 9.6);
 Class transactions falling within the class tests (LR 10);
 Related party transactions (LR 11)
 Purchases of own shares and movements of shares in and out of treasury (LR 12);
 various information in connection with takeover bids or merger proposals (under the
Listing Rules and the Takeover Code).

Question 35

What company documents need to be submitted to the UKLA for approval prior to publication?

Answer 35

1) Prospectus
2) Non-Routine circulars
3) Routine circulars dont need to be cleared in advance but must be sent to the UKLA afterwards.

Question 36

What information must be included in the annual accounts of premium listed companies?

Answer 36

 Explanation of any difference of 10% or more between the published results and any
previously published profit forecast or estimate.
 Statement of any interest capitalised.
 Details of any small related party transactions.
 Details of long-term incentive schemes for individual directors granted in special
circumstances.
 Any waivers of emoluments by the directors individually.
 Details regarding placings.
 Particulars of directors’ interests in contracts of significance.
 Particulars of any contract of significance between the company (or a susubsidiary) and
a controlling shareholder.
 Particulars of any contract for the provision of services to the company (or a subsidiary)
by a controlling shareholder.
 Details of waivers of dividends by shareholders.

Premium companies must also include:

Details of directors interests in shares

Corporate Governance statements

• Must also give a link to the website on which the full report is available and quoted companies must publish on the website.

Question 37

What documents is a listed company required to publish?

Answer 37

 an annual financial report as soon as possible after the period end (and in any event
within four months after the period end);
 a half-yearly financial report as soon as possible after the half-year end (and in any
event within two months after the half-year end); and
 an interim management statement during each half-year period (to be published at
some point in weeks 11–20 of the half-year period); this is not required if the company
publishes quarterly financial reports.

Question 38

What categories of markets has MiFID established and how are they regulated?

Answer 38

1) Regulated Maret - defiied as a multilateral system operated by a marker operator which brings together multiple third-party buying and selling. Commodity exchanges (eg ICE) and options exchanges (eg Life) are also classified as regulated markets. The Main Market, ISDX and Chi-X are regulated markets.

UK company need not be listed on a UK regulated market.

2) Multilateral Trading Facility

Defined under MiFID as a multilateral system, operated
by an investment firm or a market operator, which brings together multiple third-party buying
and selling interests in financial instruments

MTFs are allowed to trade in any stocks admitted to trading on an EEA regulated market.

MTFs can also be used to establish junior markets for unlisted companies.

3) Systematic internalisers - an investment firm which, on an organised, frequent and
systematic basis, deals on own account by executing client orders outside a regulated market
or an MTF

4) Financial instruments - a “financial instrument” means those instruments specified in
Section C of Annex I to MiFID such as Transferable securities, units in collective investment undertakings, money-market instruments

Question 39

What are investment exchanges and clearing houses?

Answer 39

Investment Exchanges are simply exchanges where investments are dealt in, such as The
London Stock Exchange.

Recognised Investment Exchanges are exempt from the FSMA general prohibition
regarding regulated activities

An exchange can only become recognised by the FCA if:

a) it has sufficient financial resources
b) rules of exchange provide safeguards for investors
c) All transactions must be reported to the FCA
d) adequate arrangements for complaints

Clearing Houses are simply organisations which provide a clearing facility just as a bank
provides a service for clearing cheques.