Economic research equity markets 2010

Equity Markets 2010 www.ThECiTyUK.com SEpTEMbEr 2010 The global equity markets staged a strong recovery in 2009 recouping some of the losses of the previous year As this ThecityUK report shows, the UK’s substantial domestic market in equities is complemented by London’s role as a major centre for trading in foreign equities Source: World Federation of Exchanges WFE members only; First months2 2000 2002 2004 2006 2008 20102 10 10 20 30 40 50 20 30 40 50 60 70 80 90 100 60 capitalisation (line) $ trillion, domestic market 110 turnover (bars) $ trillion, domestic market capitalisation and turnover1 Chart Global equity markets domestic Chart Global equity markets domestic market capitalisation and turnover1 UK equity market The market value of 1,121 companies trading on the main market of the London Stock Exchange (LSE) increased 34% in 2009 to £1,731bn The FTSE-100 index gained 22% during the year and AIm 61% Equity issues on the UK main market and AIm totalled £82.6bn in 2009, up on £70.7bn in the previous year Nearly 98% of this was in further issues IPos have however picked up in the first six months of 2010 and accounted for 31% of the £15bn raised in that period Secondary trading on the LSE largely mirrored global trends and declined a third to £2,342bn in 2009 In addition to the LSE’s main market and AIm, trading in UK equities is facilitated by PLUS markets which also has a recognised exchange status and a number of multilateral Trading Facilities (mTFs) which have captured a growing share of secondary trading since 2007 overall trading of UK equities, including trading on these venues, totalled around £3,200bn in 2009 110 60 Global equity market The value of the global equity market increased 45% in 2009 to $47.8 trillion (chart 1) This followed a 46% decline in the previous year markets posted strong returns from march 2009 to the end of the calendar year resulting in the best annual return (27%) from the mScI world Index since its inception in 1987 Global equity markets retreated around 7% in the first half of 2010 and remain well below the peak levels of 2007 with economic recovery expected to be sustained over the next few years, the markets are likely to continue their recovery although bouts of volatility may persist for some time Although IPos remained depressed for the second year running in 2009, a record $1.1 trillion was raised, mostly through further issues The chinese exchanges have been the biggest source of new capital for companies in the past 18 months Turnover on global equity markets fell by nearly a third from the record levels of the previous two years to $80.8 trillion in 2009 The NYSE Euronext (US) saw a 47% decline in turnover and Nasdaq omX 21% The first six months of 2010 saw a pickup in activity with trading up by 7% on the same period in the previous year $ trillion, domestic turnover (bars) $ trillion, domestic market capitalisation (line) SUMMAry 100 50 90 80 40 70 60 30 50 40 20 30 20 10 10 2000 2002 2004 2006 2008 2010 WFE members only; First months Source: World Federation of Exchanges 2 Source: WFE trading executed on, or reported to, other venues Exchange trading only and does not include foreign equity London's share is understated as it includes London Stock 10 Share of further issues IPOs Share of international companies listed Number of foreign Foreign equity trading1 20 30 13% 9% 20% 17% % share, 2009 equity markets Chart London's share of international Chart London's share of international equity markets % share, 2009 Foreign equity trading1 17% Number of foreign companies listed 20% Share of international IPOs 9% 13% Share of further issues 10 20 30 London's share is understated as it includes London Stock Exchange trading only and does not include foreign equity trading executed on, or reported to, other venues Source: WFE London’s importance as a centre for equity trading is illustrated by its 17% share of global foreign equity trading in 2009; its 9% share of international IPos by number (chart 2); its 6% share of global equity market capitalisation; its 13% share of further issues Relative to the size of the economy, London also has the highest equity market capitalisation of largest countries at 128% of GDP The LSE has more foreign listed companies than any other exchange Contribution to the UK economy Excluding support and back office staff, the number employed in London in the securities market totalled 81,500 at end-2008 Securities dealing generated net exports of £1.4bn in 2009 operating profits of securities dealers totalled £9.7bn in 2009 Source: World Federation of Exchanges WFE members only 2008 2009 2010 10 20 30 40 50 60 capitalisation (bars) $ trillion, 10 value of share trading (line) $ trillion, turnover1 Chart Equity market capitalisation and TheCityUK Equity Markets 2010 Chart Equity market capitalisation and turnover1 EqUiTy MArKETS worldwidE Global equity markets posted strong returns from march 2009 to the end of the calendar year, resulting in the best annual return (27%) from the mScI world Index since its inception in 1987 Despite the rise in market capitalisation of almost a half in 2009, global equity markets only regained a proportion of their losses from the previous year Global equity markets then retreated around 7% in the first half of 2010 and remain well below their peak level in 2007 (charts and 3) Although IPos remained depressed for the second year running, a record $1.1 trillion was raised on equity markets in 2009, mostly through further issues (chart 5) This was a result of supply constraints and higher cost of raising finance on other markets $ trillion, capitalisation (bars) 60 $ trillion, value of share trading (line) 10 50 40 30 20 10 with economic recovery expected to be sustained over the next few years, equity markets are likely to continue their recovery although bouts of volatility are likely to persist for some time Emerging markets which have been an important driver of growth in recent years are likely to remain so in the next few years Source: Yahoo Finance 40 2008 2009 2010 60 Nikkei 225 80 DJIA FTSE 100 100 120 index end-2007=100, month end data Chart World equity indices 2008 2009 WFE members only Source: World Federation of Exchanges 2010 Chart World equity indices primary market index end-2007=100, month end data Domestic market capitalisation of global equity markets increased 45% in 2009 to $47.8 trillion (charts 1, and 4) This follows a 46% decline in the previous year US companies accounted for around a third of the world’s equity market at the end of 2009, a reflection of the large size of the US economy NYSE Euronext (US) was the world’s largest equity exchange with domestic market capitalisation of $11.8 trillion or a quarter of the global total The Tokyo stock exchange and Nasdaq omX were the next largest with around 7% of the total each They were followed by the NYSE Euronext (Europe) and the London Stock Exchange with around 6% each In relation to GDP, London had the highest market capitalisation of the largest countries with 128% in 2009 This was several times that of other large European countries 120 100 FTSE 100 80 DJIA Nikkei 225 60 40 Capital raised by share issues The trend during 2008 and 2009 was for companies with existing listings to raise capital through further issues as companies shifted to raising capital from equity rather than bank borrowing over $1 trillion in new capital was raised through world Federation of Exchanges (wFE) member exchanges for foreign and domestic companies in 2009 This was up 4% on the previous year Around $900bn of this was in companies already listed and the remaining $132bn in IPos Strong secondary issuance has continued in 2010 (chart 5) 2008 2009 2010 Source: Yahoo Finance Source: World Federation of Exchanges First months; WFE members only 2005 2006 2007 2008 2009 20101 200 400 600 800 1,000 1,200 $bn Global value, Further issues IPOs Chart New capital raised by shares2 Emerging markets have been the driver of IPo issuance in recent years The chinese exchanges were the biggest source of new capital for companies in 2009 and the first six months of 2010 The top exchange for IPos by value in the first half of 2010 was the Shenzhen Stock Exchange with £23bn raised during the first six months of the year It was followed by the Shanghai Stock Exchange with $9bn raised during this period The Spanish Exchanges, the Korean Stock Exchange and the London Stock Exchange followed each with around $7bn raised (chart 6) The London Stock Exchange was second only to the Luxembourg Stock Exchange in the number of new foreign companies listed in 2009 (chart 7) Chart New capital raised by shares2 Global value, $bn Further issues 1,000 800 600 400 200 2005 2006 2007 2008 First months; WFE members only Source: World Federation of Exchanges IPOs 1,200 2009 20101 TheCityUK Equity Markets 2010 Source: World Federation of Exchanges London figure is LSE only and excludes Borsa Italiana; Includes both New York and Nasdaq 47,783 100 74,285 100 42,263 Total 18,725 39 17,207 23 30,195 Others 1,499 1,308 71.5 68.0 1,097 Hong Kong Exchanges 2,305 2,705 5,062 870 62.8 31.5 55 Shanghai SE 2,796 2,343 2,179 86.4 42.3 128 London SE1 1,974 990 70.2 75.9 NYSE Euronext (Europe) 2,869 26,352 35 3,239 2,569 73.5 24.3 1062 NASDAQ OMX 3,306 3,990 2,320 60.1 65.5 65 Tokyo SE Group 25 15,858 21 1,832 48.8 79.5 1062 NYSE Euronext (US) 11,838 $bn $bn companies value value GDP value total turnover total domestic market trading % of Market % of Domestic % of Number of 5% 5% Value as -concentration -2009 Table Domestic equity markets Secondary market Table Domestic equity markets Turnover Equity market turnover in 2009 -concentration -domestic and foreign companies on 5% Value as 5% Number of % of Domestic % of Market % of trading market domestic total turnover total value wFE member exchanges fell 29% in GDP value value companies $bn $bn 2009 to $80.8 trillion Turnover in the NYSE Euronext (US) 106 79.5 48.8 1,832 21 15,858 11,838 25 65 65.5 60.1 2,320 3,990 3,306 previous two years was at record levels Tokyo SE Group NASDAQ OMX 106 24.3 73.5 2,569 35 26,352 3,239 due to high turbulence in the markets NYSE Euronext (Europe) 2,869 75.9 70.2 990 1,974 128 42.3 86.4 2,179 2,343 2,796 Turnover in dollar terms fell on most London SE Shanghai SE 55 31.5 62.8 870 5,062 2,705 exchanges in 2009 NYSE Euronext Hong Kong Exchanges 1,097 68.0 71.5 1,308 1,499 2,305 (Europe) saw a 56% decline, NYSE Others 30,195 23 17,207 39 18,725 42,263 100 74,285 100 47,783 Euronext (US) 47%, London Stock Total London figure is LSE only and excludes Borsa Italiana; Includes both New York and Nasdaq Exchange 46%, Nasdaq omX 21% and Source: World Federation of Exchanges the Tokyo stock exchange 29% Trading on chinese exchanges on the other hand doubled with trading on the Shanghai Stock Exchange increasing 95% and on the Shenzen Stock Exchange 122% The first six months of 2010 saw a pickup in global activity with trading up by 7% on the same period in the previous Chart Top exchanges by IPO activity year 2 1 Source: World Federation of Exchanges Exchange Exchange Exchange Exchange Stock Stock Exchanges Stock Stock Shenzhen Shanghai Spanish Korea London 10 15 20 25 1H-2010 2009 Value, $bn Chart Top exchanges by IPO activity Turnover relative to market value in 2009 at more than eight times market capitalisation was highest on Nasdaq with its concentration of technology stocks Turnover on the London Stock Exchange was equivalent to 84% of market value The average size of share orders on global exchanges has more than halved in the five years up to 2009 This is partly a result of the development of automated and “high-frequency” trading The fall was most pronounced on the New York Stock Exchange which saw a 67% decline during this period and Nasdaq 68% The average order on the London Stock Exchange amounted to around £7,000 in 2009, well down on more than £20,000 four years earlier Falling trade sizes translate into more trades, which is to an extent helping to offset the impact of the reduction in trade fees in recent years resulting from more competition Market concentration The largest 5% of companies on the London Stock Exchange accounted for 86% of domestic market capitalisation and 42% of turnover (Table 1) In terms of market capitalisation, this was more concentrated than NYSE Euronext (US), where the largest 5% of companies accounted for 49% mergers between exchanges in recent years have included the merger between the London Stock Exchange and Borsa Italiana, the acquisition of the Nordic Exchange (omXc) by NASDAQ to form NASDAQ omX in February 2008; and the merger between the NYSE and Euronext in 2007 and its subsequent acquisition of AmEX in october 2008 Further alliances and consolidation activity are likely to continue in the coming years as markets become increasingly integrated Value, $bn 25 2009 1H-2010 20 15 10 Shenzhen Shanghai Spanish Korea London Stock Stock Exchanges Stock Stock Exchange Exchange Exchange Exchange Source: World Federation of Exchanges Source: World Federation of Exchanges Exchange Stock Luxembourg Exchange Stock London (US) Euronext NYSE Exchange Stock Singapore 10 15 20 25 1H-2010 2009 Number of new foreign companies listed through IPOs listings Chart Top exchanges by new foreign Multilateral Trading Facilities (MTFs) over the past decade, many securities exchanges have undergone significant automation-led structural changes This includes deregulation of exchanges, the opening of markets to foreign owned intermediaries and the proliferation of electronic trading The introduction of miFID in November 2007 (see page 10), has promoted the emergence of a number of mTFs A mTF is, in broad terms, a system that brings together multiple parties that are interested in buying and selling financial instruments and enables them to so These systems can be crossing networks or matching engines that are operated by an Chart Top exchanges by new foreign listings Number of new foreign companies listed through IPOs 25 2009 1H-2010 20 15 10 Luxembourg London Stock Stock Exchange Exchange NYSE Euronext (US) Singapore Stock Exchange Source: World Federation of Exchanges TheCityUK Equity Markets 2010 Source: Thomson Reuters means that no actual trades take place Markit BOAT is a reporting platform for OTC trades which Total 1,492 100 Others 143 10 BATS Europe 40 Nasdaq OMX Nordic 47 Six Swiss Exchange 54 MICEX 60 Spanish Exchanges 98 Deutsche Boerse 106 CHI-X 133 Euronext 208 14 LSE Group 272 18 Markit BOAT1 331 22 Turnover, July 2010 €bn % share trading platform Table European equity market share by investment firm or a market operator Instruments may include shares, bonds and derivatives mTFs have captured a growing share of secondary trading since their introduction (Table 2, chart 8) They accounted for over a fifth of trading in European equities in 2009 and first half of 2010, having increased their share from less than 1% at the start of 2008 Figures in chart exclude trading on markit BoAT, which is a trade reporting platform used by a number of investment firms to meet their oTc equity miFID reporting obligations This means that no actual trades actually take place on markit BoAT mTFs in general tend to be selective across markets and typically focus on secondary trading of shares which are the most liquid to trade Therefore there is a lot of competition in capturing market share in trading of the most liquid markets and equities PLUS markets on the other hand offers trading in more than 8,500 small and mid-cap shares, while the mTF PEX offers trading in Portuguese equities A number of exchanges have set up mTFs, in order to diversify the model of service they provide This includes for example Smartpool run by NYSE Euronext The London Stock Exchange bought Turquoise (a mTF set up in 2008 by a group of nine investment banks) in 2010 to create a new pan-European trading platform on the other hand, in April 2010, the NASDAQ omX Group, Inc announced that it had decided to close its pan-European mTF and Nasdaq-omX Europe Table European equity market share by trading platform % share €bn Turnover, July 2010 22 331 Markit BOAT1 18 272 LSE Group 14 208 Euronext 133 CHI-X 106 Deutsche Boerse 98 Spanish Exchanges 60 MICEX 54 Six Swiss Exchange 47 Nasdaq OMX Nordic 40 BATS Europe 10 143 Others 100 1,492 Total Markit BOAT is a reporting platform for OTC trades which means that no actual trades take place Source: Thomson Reuters Source: Thomson-Reuters Excluding trading reported on Markit BOAT January 2008 July 2010 2,000 2008 2,626 72 1,755 592 125 82 2,319 48 unvalued/suspended 1,335 < 50 670 50-500 164 500-2,000 102 > 2,000 2009 companies £m of value range Number Market 67 23 58 29 share % 1,326 24 93 122 1,087 82 1,789 0 21 115 171 10 1,482 83 £bn value market share Equity % AIM companies by equity market value Table Distribution of UK Main Market and Table Distribution of UK Main Market and AIM companies by equity market value Advantages of london as a centre for securities dealing London is one of the most important international centres for securities dealing many factors have contributed to this: Market Number value range of £m companies 2009 > 2,000 102 500-2,000 164 50-500 670 < 50 1,335 unvalued/suspended 48 2,319 2008 > 2,000 82 500-2,000 125 50-500 592 < 50 1,755 unvalued/suspended 72 2,626 - Dynamic, transparent and liquid markets; - most of the largest investment banks and securities houses have major securities operations in London They facilitate access to a huge pool of global capital; - Technologically advanced trading systems have helped to reduce the costs of execution; - A consistent, politically neutral legal system that is widely used and understood globally, and confers confidence in doing business with the UK and in investing in the UK; - The UK has the second largest fund management industry, which has helped to bring additional business in securities dealing to London; Source: London Stock Exchange domestic and international companies; 2000 2002 2004 2006 29 58 82 1,087 122 93 24 1,326 23 67 Source: London Stock Exchange - The large pool of skilled labour in international financial markets concentrated in central London; % Equity market share value £bn 83 1,482 10 171 115 21 0 1,789 % share first months 2008 20102 10 20 30 40 50 60 70 80 £bn New companies Further issues Market and AIM companies1 Chart 14 Total equity issues by UK Main Chart 14 Total equity issues by UK Main Market and AIM companies1 - London’s position as the financial services gateway to the Single European market and the European time zone; £bn - Lower costs of capital for companies issuing shares, a result of the deep pool of funds and efficient market structures; Further issues New companies 80 70 - Strong reputation and experience, built up over several centuries 60 50 combined market value of £56.6bn (chart 13) This was up by around a half on the previous year’s total, but down around 40% on record levels in 2007 Despite the drop since 2007, the AIm is one of the leading global markets for smaller companies In terms of market capitalisation, around a third of companies listed on the AIm were from overseas London accounted for the largest share of companies from the UK with 40% (by region of registration), followed by the channel Islands 19%, North-west 13% and East England 6% (chart 17) 40 30 20 10 2000 2002 2004 2006 Plus Markets has had a Recognised Investment Exchange status since 2007 It facilitates the trading of around 8,500 securities including both equity and debt and primarily focuses on attracting retail investor volumes The 166 Plus-quoted/listed companies had a market capitalisation of £2.5bn In contrast to the AIm, the Plus market has attracted more private than institutional investments In August 2010, the Plus market announced that it had set up the Plus Derivatives Exchange, or PDX, which will begin trading interest swap rate products in conjunction with index provider FTSE Group towards the end of 2010 Total equity issues Equity issues by domestic and international companies on the UK main market and AIm totalled £82.6bn in 2009 (chart 14), up on £70.7bn in the previous year Including the LSE’s Professional Securities market and Specialist Fund market, issues totalled around £83bn in 2009, up on £71bn in the previous year The strong figures were underpinned by a number of substantial secondary issues during the year Nearly 98% of equity issues in 2009 were in further issues, up on 90% in the previous year and 42% in 2007 IPos have however picked up in the first six months of 2010 and accounted for 31% of the $15bn raised in that period 2008 domestic and international companies; Source: London Stock Exchange Source: London Stock Exchange Domestic equities 1999 2001 2003 2005 2007 20102 first months 2009 500 1,000 1,500 2,000 2,500 £bn orderbook trading1 Chart 15 London Stock Exchange Chart 15 London Stock Exchange orderbook trading1 £bn 2,500 2,000 1,500 1,000 500 1999 2001 2003 2005 Domestic equities Source: London Stock Exchange 2007 2009 TheCityUK Equity Markets 2010 Source: London Stock Exchange Total Other BP Vodafone Group Gazprom OAO Toyota Motor Corp General Electric Co Total S.A JP Morgan Chase & Co Royal Dutch Shell HSBC Holdings Bank of America Corp July-2010 1,732 771 76 78 81 85 94 98 101 108 113 127 £bn value Market 100.0 44.5 4.4 4.5 4.7 4.9 5.4 5.7 5.8 6.2 6.5 7.3 value market total % of Table Largest UK companies money raised on the AIm during 2009 totalled £5.5bn, up on £4.3bn in the previous year but down on the record £16.2bn raised in 2006 The AIm nevertheless retains its unique role as one of the world's leading growth company markets Table Largest UK companies Secondary market Client profile The bulk of UK shares are held by institutional investors such as pension funds and insurance companies and overseas investors Private clients’ share has gradually fallen over the past few decades major investors in UK shares include: - - Institutional investors hold the majority of UK listed equities At the end of 2008 they accounted for close to a half of UK ordinary shareholdings The largest holders were pension funds and insurance companies with 27% of the overall total (chart 19) Private clients Individual shareholding as a proportion of total share ownership has been on a downward trend since the 1960s, from over 50% to around 30% in 1980 to 10% in 2008 This, however, does not % of total market value 7.3 6.5 6.2 5.8 5.7 5.4 4.9 4.7 4.5 4.4 44.5 100.0 Source: London Stock Exchange Source: London Stock Exchange Total: £1,020bn Consumer Services Oil & Gas 12% Goods Consumer 15% 17% 10% Materials Basic 6% Health Care Telecomm 5% 22% 13% Other Financials % share, 2009 orderbook trading by industry Chart 16 London Stock Exchange FTSE Chart 16 London Stock Exchange FTSE orderbook trading by industry % share, 2009 Other Health Care Financials 13% Telecomm 22% 5% 6% The most actively traded equities are typically the largest companies Trading in FTSE-100 companies represented around three-quarters of UK orderbook trading in 2009 compared with 60% a decade earlier Equities are also traded on derivatives markets but coverage of this is the subject of a separate ThecityUK report - Derivatives The majority of UK quoted companies by market value are drawn from services (mainly banks and telecommunications), oil and gas and manufacturing (Table 6, chart 16) These sectors have a high proportion of large firms which account for the bulk of activity companies in the telecommunications and information technology sectors have seen their share of market value and turnover fall over the past decade from 15% to 5% Financial services companies have increased their share of market turnover in recent years and accounted for nearly a quarter of the total in 2009 127 113 108 101 98 94 85 81 78 76 771 1,732 Bank of America Corp HSBC Holdings Royal Dutch Shell JP Morgan Chase & Co Total S.A General Electric Co Toyota Motor Corp Gazprom OAO Vodafone Group BP Other Total Trading on the LSE totalled £2,342bn in 2009, down a third on the previous year mirroring trends on global markets The value traded through the orderbook in domestic equities totalled £1.1 trillion, down 44% on the previous year (chart 15) Including international equities, orderbook trading fell 43% during the year to £1.2 trillion Dealing business on the AIm totalled £33.7bn in 2009, down from £49.3bn in the previous year In 2009 shares worth over £53bn were traded on Plus markets, up from around £36bn in the previous year According to Thomson-Reuters data, overall trading of UK equites, including trading on Plus market, mTFs and the oTc trading reporting platform markit BoAT totalled around £3,200bn in 2009 The implementation of miFID in November 2007 has increased competition for securities trading business In July 2010, the LSE Group accounted for 38% of trading in FTSE-100 shares, followed by markit BoAT with 32%, cHI-X 14% and BATS Europe 5% (Table 7) It is likely that the next few years will see consolidation between the more than 30 mTFs that have been established in Europe since 2007 Market value £bn July-2010 Consumer Goods 10% 17% 12% Oil & Gas Basic Materials 15% Consumer Services Total: £1,020bn Source: London Stock Exchange Source: London Stock Exchange Channel Islands Northwest 19% 13% East England Southeast 6% 5% 40% London 5% 4% Southwest 3% Northeast 3% Scotland Wales, 1% Midlands N.Ireland, 1% % share, market value, by region of incorporation companies operating in the UK Chart 17 Geographical distribution of AIM Chart 17 Geographical distribution of AIM companies operating in the UK % share, market value, by region of incorporation N.Ireland, 1% Midlands Wales, 1% Scotland 3% Northeast 3% Southwest 4% 5% Southeast 5% London 40% East England 6% 13% Northwest 19% Channel Islands Source: London Stock Exchange TheCityUK 283 14 10 13 41 91 107 100 5 14 32 38 €bn % share Table UK share by trading platform Table UK share by trading platform include shareholdings held indirectly through unit trusts - Equity Markets 2010 Source: Thomson Reuters means that no actual trades take place Markit BOAT is a reporting platform for OTC trades which Total 334 100 Others 18 Johannesburg Turquoise 11 BATS Europe 14 CHI-X 45 13 Markit BOAT1 107 32 LSE Group 132 40 All UK equities Total Others Johannesburg Turquoise BATS Europe CHI-X Markit BOAT1 LSE Group FTSE-100 trading Turnover, July 2010 Turnover, July 2010 FTSE-100 trading LSE Group Markit BOAT1 CHI-X BATS Europe Turquoise Johannesburg Others Total Overseas investors The proportion of UK ordinary shares held by overseas investors increased from 4% in 1981 to 42% in 2008 This reflects both international mergers where the new company is listed in the UK and also flotations of UK subsidiaries of foreign companies It is also due to the greater internationalisation of institutional investors’ portfolios Their share ownership is mostly in FTSE-100 companies % share 107 91 41 13 10 14 283 38 32 14 5 100 All UK equities 40 132 LSE Group 32 107 Markit BOAT1 13 45 CHI-X 14 BATS Europe 11 Turquoise Johannesburg 18 Others 100 334 Total Markit BOAT is a reporting platform for OTC trades which means that no actual trades take place Source: Thomson Reuters oThEr ACTiViTiES The role of traders Traders retain a crucial role in equity markets although the basis of their involvement has changed The proportion of trading undertaken on traders’ own books throughout Europe has declined over the past decade with a much higher proportion of trades now worked through the exchanges through for example SETS on the London Stock Exchange To facilitate growth in trade sizes, intermediaries are committing more capital to accommodate institutional customers with large orders which demand immediacy This involves a degree of risk that the price of the share may move in the time it takes to organise the sale London retains a large and influential role in this process because investment banks located there remain the main suppliers of this risk capital, providing immediate liquidity for large block trades in many European stocks London’s role in providing risk capital is long standing and reflects the way the market has evolved many of the traders are based in London, although some are also located in other European cities €bn Source: Thomson-Reuters in July 2010 was 58% for all equities and 56% for FTSE-100 Excluding trades reported on Markit BOAT, LSE’s share 30 2008 2009 2010 35 40 45 50 55 60 % share All UK equities FTSE-100 of trading in UK equities Chart 18 London Stock Exchange share Chart 18 London Stock Exchange share of trading in UK equities % share FTSE-100 All UK equities 60 55 50 45 Clearing and settlement Despite the gradual integration of European securities markets, its clearing and settlement system remains fragmented The charges for clearing and settling cross-border trades in Europe are several times higher than for domestic trades although this is gradually coming down following the implementation of miFID The European code of conduct for clearing and settlement of cash equities, implemented in January 2008, represents a market-led initiative to create a cost efficient European framework for the trading, clearing, settlement, and custody of cash equities Pan-European settlement systems such as clearstream and Euroclear provide services in both domestic and international securities In addition to the pan-European clearing and settlement systems, there remains a significant number of different national providers of these services The FSA has responsibility for overseeing the integrity of UK investment markets It recognises four clearing houses (see box on page 10) 40 35 30 2008 2009 2010 Excluding trades reported on Markit BOAT, LSE’s share in July 2010 was 58% for all equities and 56% for FTSE-100 Source: Thomson-Reuters Source: Office for National Statistics 1981 1993 2000 2004 2008 1975 1989 1997 2002 2006 Other 10 UK individuals 20 30 Overseas 40 50 60 UK institutions 70 % share Chart 19 UK share ownership Custody is concerned with the safe keeping of assets and settlement of trades on behalf of fund managers Its rapid growth over the past decade has been fuelled by the growth of fund management operations, increased cross-border trading and expansion into new service areas It is expected that the shift towards private pension provision in Europe in the next decade will add further stimulus to its growth The global custody market is highly concentrated with a small number of firms dominating the market Latest available data shows that citi was the largest international custodian (in terms of cross-border assets under custody) with $6.7bn at the end of 2007 It was followed by the Bank of New York with $5bn Chart 19 UK share ownership % share 70 UK institutions 60 50 40 Overseas 30 20 UK individuals 10 Other 1975 1989 1997 2002 2006 1981 1993 2000 2004 2008 Source: Office for National Statistics TheCityUK Equity Markets 2010 Source: Institutional Investor 1,396 1,725 Brown Brothers Harriman & Co 1,800 3,800 Northern Trust Co 1,804 4,909 Mellon Group 1,870 3,305 Societe Generale 2,787 12,331 State Street Co 3,603 4,840 HSBC Bank 3,951 4,890 BNP Paribas 4,775 14,661 JP Morgan Chase & Co 5,030 13,757 Bank of New York Co 6,687 10,650 Citi assets ($bn) assets ($bn) Cross-border Total End-2007 Table Largest international custodians Clearing houses in the UK clearing houses in the UK recognised by the FSA include: Euroclear UK and Ireland is the recognised settlement system for the UK market and Irish equities In September 2002, cRESTco, which has previously been the settlement system for the UK stock market, became a part of the Euroclear group on January 2007, EmXco also became part of the Euroclear group LCH.Clearnet In December 2003 London clearing House merged with clearnet to create LcH.clearnet This is the leading independent ccP group in Europe, serving major international exchanges and platforms, equity markets, exchange-traded derivatives markets, energy markets, the interbank interest rate swaps market and the majority of the Euro-denominated and sterling bond and repo markets ICE Clear Europe which provides clearing services for all IcE Futures Europe contracts and all cleared oTc contracts transacted in IcE's global oTc markets European Central Counterparty Ltd is the European subsidiary of The Depository Trust & clearing corporation that provides pan-European clearing services EuroccP clears for Turquoise, SmartPool and NYSE Arca Europe EuroccP clears and settles trades in partnership with citi Global Transaction Services, who acts as EuroccP's settlement agent, in 15 major national markets in Europe including the UK The NYSE Euronext announced in may 2010 that, subject to regulatory approval, it plans to spend $60 million on two new, purpose-built, clearing houses based in London and Paris in late 2012 (Table 8) clearing banks and fund management companies hold a large slice of the local custody markets in the UK However a segment of the market has now been captured by foreign institutions established in the UK, particularly US banks and trust companies regulation UK regulation The Financial Services Authority (FSA) regulates over 1,000 firms involved in dealing or advising in securities or derivatives The Listing function was transferred to the FSA from the London Stock Exchange in 2000 The FSA also recognises and supervises a number of Recognised Investment Exchanges (RIEs) under the Financial Services and markets Act 2000 The RIEs in may 2009 included the London Stock Exchange and Plus markets and four derivatives exchanges - EDX London, IcE Futures Europe, LIFFE Administration and management, and the London metal Exchange EU regulation The EU also has a major influence on the regulation of trading in securities markets mainly through miFID which replaced the Investment Services Directive in November 2007 The main objective of miFID is to increase competition and consumer protection in investment services miFID is the cornerstone of the European commission's Financial Services Action Plan whose measures will significantly change how EU financial service markets operate miFID provides a single passport for EU investment firms which enables them to engage in investment services throughout the EEA without separate authorisation by the member State in which the firm does business miFID has facilitated competition in the trading of shares on stock exchanges for the first time It also allows investment firms from one member State the right of access to counterparty clearing and settlement systems in another member State 10 Table Largest international custodians End-2007 Cross-border assets ($bn) Citi 6,687 Bank of New York Co 5,030 JP Morgan Chase & Co 4,775 BNP Paribas 3,951 HSBC Bank 3,603 State Street Co 2,787 Societe Generale 1,870 Mellon Group 1,804 Northern Trust Co 1,800 Brown Brothers Harriman & Co 1,396 Source: Institutional Investor Total assets ($bn) 10,650 13,757 14,661 4,890 4,840 12,331 3,305 4,909 3,800 1,725 Source: Office for National Statistics Revenue -5 Expenditure Operat result 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10 15 20 25 30 35 40 £bn dealers Chart 20 Operating results of UK securities TheCityUK Equity Markets 2010 ConTribUTion To ThE UK EConoMy Chart 20 Operating results of UK securities dealers The UK securities market includes trading in domestic and international securities, both equities and bonds, most of which is centred in London The securities markets’ wider contribution to the economy is demonstrated in the integral role they play in enabling governments, companies and other organisations to raise money to meet their future financing needs This has particularly come to the forefront during the recent economic downturn where the securities markets to a large extent filled the gap in financing brought about by the fall in liquidity and capital constraints in the banking sector £bn 40 35 30 25 20 15 10 revenue and profits Securities dealers, perhaps more than any other part of the financial sector, tend to experience a large degree of volatility in their revenue and profits, depending on the performance of the markets in a given year This volatility arises largely from fluctuations in profits and losses in market making, rather than commission and fee income which is more stable -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Revenue Expenditure Operat result Source: Office for National Statistics 1999 2001 2003 2005 2007 2009 1,000 2,000 3,000 4,000 5,000 Source: Office for National Statistics £bn Chart 21 Net exports of UK securities dealers operating profits of securities dealers totalled £9.7bn in 2009, up from £3.7bn in the previous year (chart 20) In the decade prior to this, securities dealers results fluctuated between a loss of £0.2bn and a profit of £9.5bn The bigger operating profit in 2009 was predominantly a result of a three-fold increase in profits from securities dealers’ dealing on own account Chart 21 Net exports of UK securities dealers £bn 5,000 Employment The number of employed in London in the equity and bond sectors totalled 81,500 at the end of 2008, down from a record 84,800 in the previous year This figure does not include support and back office staff 4,000 Value added No official estimate is made for securities dealers’ contribution to GDP, but it is possible to make an estimate from market data Total expenditure of securities dealers in 2009 has been estimated by the oNS at £31.3bn Employment costs of London Stock Exchange firms averaged around 40% of operating costs in recent years; applying this proportion to the £31.3bn implies total employment costs of £12.5bn 2,000 3,000 1,000 1999 2001 2003 2005 2007 2009 Source: Office for National Statistics The figures for securities dealers’ profits in chart 20 include trading on securities dealers’ own account which does not form a part of GDP Excluding this, securities dealers had an operating loss of £11.4bn in 2009 which taken together with employment costs implies a value added contribution of £1.1bn This is equivalent to around 0.1% of GDP in “value added” terms, down on the 0.6% contribution of securities dealing in recent years net exports Net exports of securities dealers make a significant contribution to the UK balance of payments They consist of fees and commissions, spread earnings and income and payments relating to other services In total, net exports fell to £1.4bn in 2009 from £4.8bn in 2008 (Table 9, chart 21) A fall in imports by securities dealers was more than offset by rising exports in both commissions and spread earnings Source: Office for National Statistics 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 £m 6,829 713 8,362 1,779 8,429 2,815 6,316 2,544 4,628 1,918 4,316 1,666 3,922 1,316 4,290 1,168 5,211 1,492 5,632 1,033 3,996 1,209 and fees earnings Commission Spread Exports 7,542 10,141 11,244 8,860 6,546 5,982 5,238 5,458 6,703 6,665 5,205 Exports Total 716 1,119 985 1,643 1,244 862 795 1,009 1,296 1,199 829 1,428 3,972 4,763 2,983 2,266 3,658 3,294 3,091 3,380 3,172 2,865 Imports Exports Net Table Net exports of UK securities dealers Table Net exports of UK securities dealers £m 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Exports Commission Spread and fees earnings 1,209 3,996 5,632 1,033 5,211 1,492 4,290 1,168 1,316 3,922 1,666 4,316 1,918 4,628 6,316 2,544 2,815 8,429 8,362 1,779 6,829 713 Total Exports 5,205 6,665 6,703 5,458 5,238 5,982 6,546 8,860 11,244 10,141 7,542 Imports Net Exports 829 1,199 1,296 1,009 795 862 1,244 1,643 985 1,119 716 2,865 3,172 3,380 3,091 3,294 3,658 2,266 2,983 4,763 3,972 1,428 Source: Office for National Statistics 11 TheCityUK Equity Markets 2010 LINKS TO OTHER SOURCES OF INFORMATION: bank for international Settlements www.bis.org Thomson-reuters www.thomsonreuters.com Centre for Economic and business research www.cebr.com UbS Global Asset Management www.ubs.com Financial Services Authority www.fsa.gov.uk world Federation of Exchanges www.world-exchanges.org institutional investor www.institutionalinvestor.com london Stock Exchange www.londonstockexchange.com national Statistics www.statistics.gov.uk plus Markets www.plusmarketsgroup.com datafiles Datafiles in Excel format for all charts and tables published in this report can be downloaded from the Reports section of ThecityUK’s website www.TheCityUK.com Sign up for new reports If you would like to receive immediate notification by email of new ThecityUK reports on the day of release please send your email address to signup@TheCityUK.com TheCityUK research Centre: Report author: Marko Maslakovic, Senior Manager, Economic research, marko.maslakovic@ThecityUK.com, +44 (0)20 7776 8977 For further information about our work, or to comment on the programme/reports, please contact: leslie Sopp, head of research leslie.sopp@ThecityUK.com, +44 (0)20 7776 8979 ThecityUK, 65a Basinghall Street, Ec2V 5DZ www.TheCityUK.com © copyright September 2010, ThecityUK TheCityUK is a new independent membership body, promoting the UK financial and related professional services industry The cityUK’s key areas of activity include: - Promoting the UK-based industry as a world leader offering unrivalled service and expertise to partners around the world - creating a partnership for a sustainable industry: demonstrating the industry’s role in enabling growth and prosperity in the wider UK economy - Using research, insight, data and analysis to meet the needs of its members and to provide the evidence to support our promotional objectives This report is based upon material in ThecityUK’s possession or supplied to us, which we believe to be reliable whilst every effort 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losses from the previous year Global equity markets then retreated around 7% in the first half of 2010 and remain well... Number of 5% 5% Value as -concentration -2009 Table Domestic equity markets Secondary market Table Domestic equity markets Turnover Equity market turnover in 2009 -concentration -domestic and