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London Exchange Gets Ready for the Millennium
by Alan Osborn

THE THREE GIANT bronze horses guarding the entrance to the new London Underwriting Centre in the City of London are nicknamed Sterling, Dollar and Yen. It's a somewhat graphic reminder of London's status as one of the world's three top financial centres along with New York and Tokyo.

Banking, investment banking, insurance and associated activities last year provided more than 22 billion pounds sterling to Britain's earnings - or about 6.5 per cent of gross domestic product. As Eddie George, Governor of the Bank of England, says: "The City is an international centre, not just a European one. We provide the links between New York and Tokyo on a scale quite disproportionate to our size.'' Last year 36 per cent of all global foreign currency dealings took place in London - more than in New York and Tokyo combined and six times more than in Frankfurt. Nearly a fifth of all cross-border bank lending originates in London.

London is the undisputed global centre for international equity trading with 60 per cent of the turnover and is second only to Chicago in the buying and selling of options and futures.

London Stock Exchange has more overseas companies listed than any other exchange, and has twice as many listings as Frankfurt. The City dominates the trade in Eurobonds, commanding some 70 per cent of the market. The number of overseas listings increases almost daily. In April 1997 the first ever Chinese company was listed on the London Stock Exchange following a successful trade treaty signed in Beijing which ensured financial co-operation between the regulators in both markets.

One relatively recent Stock Exchange initiative was the introduction of the Alternative Investment Market (AIM). This is a new market designed to attract young companies which are dynamic and entrepreneurial. It has already proved a success with nearly 300 companies already listed.

Equity trading in London is so easy and cheap that many Japanese and European brokers prefer to trade between themselves in their own country's shares in London rather than in their own capitals.

The City's largest derivatives market is the London International Financial Futures Exchange (LIFFE) which enjoyed a bumper year in 1996 with business up by 10 per cent. Other main derivatives exchanges include the International Petroleum Exchange, the only oil futures exchange in Europe, and the London Metal Exchange (LME).

The LME is the benchmark for world metal prices. Business has been booming at such a rate that the exchange moved in recent times into new state-of-the-art premises. Traders from every corner of the globe are able to plug in by computer link to see the market in action although trading is still carried out in the traditional way, with bids yelled and semaphored by dealers in the ring.

Last year the first fully computerised share settlement system was opened in London. CREST allows for the paperless settlement of share transactions. It will gradually take over from the current system where investors get share certificates and, when they come to sell, must complete forms. CREST is a private company and was developed by a team from the Bank of England and the Treasury.

The City is the international centre for gold trading. Twice a day the price of gold is fixed by representatives of the London Bullion Market Association: a procedure undertaken by tradition at the City headquarters of N.M. Rothschild and Sons.

Traditionally London has led the field in insurance - through Lloyds and the scores of underwriters now housed in the futuristic offices of the London Underwriting Centre. In 1996 total insurance and reinsurance business transacted in the City exceeded 22 billion United States dollars.

History helps towards an understanding of why Britain has achieved such prominence in the financial world. In the last century Britain was the world's leading "tiger'' economy. British banks and finance houses followed traders across the seas. An outward-looking, global mentality took hold at a time when other financial centres were focused inwards.

The English language has proved to be another major asset. English today is unchallenged as the world language for business, finance and telecommunications.

Geography also counts. Midway in the time zone between New York and Tokyo London is one of the few centres where bankers and traders can talk to their counterparts across the world in business hours on the same day.

Openness and ease of trading are other factors. London differs from continental centres in the flexibility and lightness of its regulations.

It is scarcely surprising then that 550 international banks and 170 securities houses representing every country of any economic significance are now located in the City.

As Mr George said recently: "Why would so many European banks want to shift their operational bases to London if they did not believe that London would stay at the top of the league?'' But it now looks as if this drift of key institutions to London has so alarmed the continental market authorities that it has spurred them to reform their own exchanges. This certainly seems to be the case in the market for futures and options.

LIFFE does more trade in this exotic but massively lucrative market than Paris and Frankfurt combined. The London market is to invest 100 million pounds sterling to provide more sophisticated electronic dealing services, especially outside normal business hours, to facilitate links with Chicago and Tokyo. This marks a break with the traditional "open outcry" trading system and can be read as a signal of how determined London traders are to maintain their dominance.

The same ambition has inspired major reforms in the London Stock Exchange itself, beginning with the so-called Big Bang ten years ago when fixed commission charges were abolished and foreigners were permitted to buy into London brokerage firms. London then joined New York and Tokyo in an electronic triangle to link the world's premier exchanges.

In October this year, the Stock Exchange Electronic Trading System (SETS) was introduced, marking a sharp break with the past system by allowing brokers to enter, buy or sell orders directly into a central computer which then matched them with the best available deals on offer. The SETS system does away with "middlemen," leading to lower dealing costs and narrower spreads between buying and selling prices.

The revolutionary "Big Bang Two" reform, which brought the City into line with other major exchanges, was accompanied by the introduction of a one-stop regulatory authority designed to increase efficiency and lower operating costs while at the same time preserving the minimum controls necessary to ensure public confidence in the system.

London now believes that where operational efficiency is concerned it is in a strong position to meet the challenge looming in 2001 when a full merger of the Frankfurt, Paris and Zurich stock markets is planned.

London Stock Exchange
Old Broad Street, London, United Kingdom, EC2N 1HP
Telephone: +44 171 797 1315
Fax: +44 171 334 8928
London Stock Exchange

Bank of England
Threadneedle Street, London, United Kingdom, EC2R 8AH
Telephone: +44 171 601 4444
Fax: +44 171 601 5460
Bank of England

The London International Financial Futures and Options Exchange
Cannon Bridge, London, United Kingdom, EC4R 3XX
Telephone: +44 171 623 0444
Fax: +44 171 588 3624
The London International Financial Futures and Options Exchange

London Underwriting Centre
Building 3, Minster Court, London, United Kingdom, EC3R 7DD
Telephone: +44 171 617 000
Fax: +44 171 617 5050

London Metal Exchange
56 Leadenhall Street, London, United Kingdom, EC3A 2BJ
Telephone: +44 171 264 5555
Fax: 171 680 0505
London Metal Exchange      Copyright ©1999, LLC