Global exposure, best execution: why London is at the centre of global securities trading
Group Head of Securities Trading & CEO Turquoise Global Holdings
The world trades in London
In the time zone that is central to the global business day, London’s role in global finance has always been pivotal. And at London’s heart is London Stock Exchange, which for centuries has provided choice and liquidity for investors and traders around the world.
London provides the bridge between markets from Asia to America, overlapping market hours across 27 markets while allowing for real-time access to global products. Connect to London – and traders, investors and issuers connect to the world.
Allied to its optimal position has been London’s openness and connectivity, creating a network at almost unmatched scale for the global community of issuers, investors, intermediaries and traders. The latest Global Finance Centres Index which assesses against factors such as business environment, human capital, infrastructure, taxation reputation, and financial sector development, recognised London as Europe’s major global finance centre and consistently recognises London and New York among the top two positions worldwide.
The ability of London’s capital markets to attract global demand for tradeable instruments, and to provide highly efficient processes for their trading, clearing and settlement, has seldom been so important at a time of major structural shifts in the global economy.
Investors are searching for growth in a world of low interest rates. The hunt for alpha in a world of constant information means that their focus has sharpened on the need for highly efficient trading to minimise their cost of investment and enhance their long-term returns.
To support this, breadth of exposure, speed and best execution is delivered by a single connection to LSEG’s trading venues, allowing investors to access securities from over 100 countries including developed as well as emerging markets.
Vibrant demand from issuers
London remains the premier venue for capital raising in Europe – with companies raising £23.9bn through IPOs and follow-ons year to date, representing the most active start to the year for capital raising in more than a decade.
It also stands out as the world’s leading exchange for international companies. In 2020, 25% of the world’s cross-border IPO capital was raised in London – and the appetite for international companies to tap into London’s depth of investor base has remained strong in 2021. These new listings exemplify London’s global appeal, with issuers from Europe, Asia-Pacific and North America.
More than 75% of global revenues of FTSE 100 companies derive from commercial activities outside of the UK, while 38% of all London-listed companies are of international origin. London Stock Exchange’s AIM is the world’s largest growth market; now 26 years old, it raised £5.3bn in growth capital in 2020.
Alongside the continuing high level of international issuer interest in the London markets has been the momentum for IPOs in the tech and consumer sectors and the drive towards a low-carbon economy by investors and corporates.
Trading on London Stock Exchange and Turquoise: one connection, 4,100+ securities
It is not just the scale and depth of London’s secondary markets that gives confidence to issuers – it is the breadth and quality of our execution. At LSEG we build efficient models that reduce implicit costs and contribute to long term investment returns. With emerging trends of big data and analytics, we offer a single point of access for viewing, trading and analysing securities of many countries.
The act of connecting with London Stock Exchange also connects investors to our multilateral trading facility Turquoise at the same time, providing access to a single ecosystem for securities trading. Turquoise and our EU venue Turquoise Europe complement London’s primary markets with multiple additional execution channels and liquidity, offering a broad universe of more than 4,100 securities with seamless access to enter prices and trade securities of 19 major European and emerging markets as well as US stocks, IOB Depositary Receipts, ETFs and European Rights Issues - all through one interface to our LSEG data centre and membership.
Global investors use London Stock Exchange and Turquoise for multiple ways to buy and sell stocks during the daily trading session – from traditional Central Limit Order Books on London Stock Exchange and Turquoise Lit to Turquoise Plato – a fully regulated dark pool that is the industry’s leading midpoint and electronic block trading service, and Turquoise Plato Lit Auctions – offering investors potential price improvement by trading at the midprice rather than crossing the Bid Offer spread. At the end of the day, London Stock Exchange as the Primary Market features its Closing Auction that provides the daily closing price that serves as Record of Reference for constituent calculations in Indices and Fund Net Asset Values.
The overall result is a full suite of execution channels to help investors get their business done on fully regulated market mechanisms – whatever the economic environment on a particular trading day.
The growth of ETPs
Diversification and international exposure to securities is core to the Exchange Traded Product (ETP) market on London Stock Exchange. Tracking global, country-specific and different asset classes indices, and therefore covering a wide variety of investment exposures, ETPs have become the building blocks for many sophisticated investment strategies.
Assets under management in the European ETP market hit a new milestone of $1.3tn at the end of 2020 and this has been reflected in London’s growing ETP order book turnover, which was up 50% YoY in 2020. Over 1,700 ETPs are listed in London, with 20 registered market makers providing continuous ETP pricing and a high-quality pool of liquidity.
What distinguishes London is the international nature of its ETP market. London Stock Exchange supports trading in five different currencies – and the majority of ETP trading in London is in US dollars. Indeed, US dollar trading accounts for 50% more than all other currencies combined on London Stock Exchange’s ETP market.
More than 300 ETFs available on London Stock Exchange provide investors with exposure to underlying US securities - one of the most heavily traded ETPs in London are the S&P 500 ETFs - and there are currently 39 ETFs giving direct exposure to China-related assets including Chinese Bonds.
London Stock Exchange has continued to innovate with the recent launch of a new Request for Quote (RFQ) order type on the Main Market. The new RFQ 2.0 order type offers auto-complete RFQ functionality with an innovative order book sweep and central clearing (CCP) built in, all under one exchange. It helps investors get better execution outcomes by accessing different types of liquidity instantly and in one place.
In line with the wide-reaching trend for sustainable investment products, London is also witnessing huge growth in ESG ETFs. Over 50% of new ETF listings in 2021 have been ESG ETFs; trading in ESG ETFs has risen from relatively low levels in 2019 to currently account to almost 5% of all trading on London’s markets. This looks set to be one of the London market’s fastest growing group of products over the next few years.
International Order Book (IOB)
The International Order Book is a world-leading venue for GDRs, by capital raised and its diversity of issuer base. Providing exposure and access to many of the world’s fastest-growing emerging markets paired with developed market confidence. Investors can access 130+ GDRs, offering global reach with the certainty and international settlement rules of trading in London and world leading property rights protected by UK law.
Its average daily turnover in the second half of 2020 was $344mn. Russian listed depositary receipts account for two-thirds of trading activity on the IOB - London is the largest secondary market for Russian securities outside of Moscow. But investor appetite for trading securities from other geographies is increasing. Trading in Indian securities has risen; Indian GDRs were ranked 3rd in IOB trading in 2020, after Russia and South Korea. The total turnover in Indian GDRs in 2020 was $3.76bln, up 73% compared to 2019.
The GDR of Samsung remains the most actively traded Asian security on the market. South Korean DRs turnover on IOB was $4.3bn in 2021 YTD (Jan - May), an increase of 47% YoY.
Global Equity Segment
London’s time zone means that it is well-placed to help reduce the barriers for Asian investors to trade international securities. London Stock Exchange’s Global Equity Segment (GES) enables Asian investors to trade US blue chips and US-listed Asian ADRs in London. Stocks are admitted to trading in London, with investors being able to benefit from London’s trading hours and trading in US dollars without stamp duty.
More than 50 US stocks and 27 Asian ADRs, including global brands such as Microsoft and Alibaba, are bought and sold daily.
Shanghai-London Stock Connect
London has a culture of adaption and innovation. Today, it is developing its ties with Asia to serve the growing needs of Asian companies and investors. An ecosystem of market participants connecting the Asian and UK capital markets is being built.
A notable example is Shanghai-London Stock Connect, which enables Shanghai listed firms to list GDRs in London and provides a unique opportunity for international investors to access China A shares from outside Greater China. Trading and settlement is in US dollars and takes place on the dedicated IOB Shanghai Segment.
FX and derivatives: further trading opportunities
As a result of the enlargement of LSEG through its merger with Refinitiv, additional trading capabilities in foreign exchange and derivatives will join the same technology base as London Stock Exchange and Turquoise and will enhance our multi-asset offer available with a single LSEG connection.
London’s network effect
London’s openness and connectivity means that the reach and scale of its network is increasing. The community of Asian market participants connecting to London Stock Exchange has significantly expanded in recent years. In December 2020, Huatai Securities became the first Registered Market Maker from Asia, providing additional liquidity to Shanghai London Stock Connect GDRs.
Investors worldwide access London’s financial centre through investment firms that are members of LSEG. Today, investment firms in Hong Kong – like the UK, Switzerland and Europe – can apply to become direct members of London Stock Exchange and Turquoise, and there is even direct connectivity of data centres from within Hong Kong Exchange. In a world where electronic access adds efficiency, discussions are well under way to provide similar direct access with other financial centres.
For centuries, London has been a strong enabler of the global economy. The world has always traded with London. That privilege must be consistently earned. With constant developments to reduce friction for market participants and costs for investors, thereby compounding their long-term returns, and by designing products and services that expand participation in the global capital markets, London Stock Exchange can continue to attract globally diverse investors as the venue from which they conduct their international business.
1. https://www.longfinance.net/media/documents/GFCI_29_Full_Report_2021.03.17_v1.1.pdf | https://www.longfinance.net/publications/long-finance-reports/global-green-finance-index-5/ | https://www.longfinance.net/publications/long-finance-reports/global-green-finance-index-4/ | https://www.thecityuk.com/assets/2020/Reports/8716847a2f/Key-facts-about-the-UK-as-an-international-financial-centre-2020.pdf
2. Dealogic, June 2021