Stock exchanges must embrace technology and digitally savvy younger generations to stay with the times
by Anthony Hilton FCSI(Hon)
Almost a decade ago, in 2012, John Kay published his Review of UK equity markets and long-term decision making. Kay observed that, in aggregate, companies no longer went to the stock exchange to raise capital, its traditional raison d’être. Rather, they extracted capital through dividends, mergers and buying back their own shares. As a result, the number of listed companies was falling.
The Quoted Companies Alliance put numbers on it. In 2018 it said that, over the ten-year period from 2007 to 2017, the number of main market companies listed on the London Stock Exchange fell by 31%, while the number of Alternative Investment Market listings decreased by 41%. And the same thing was happening in the US. In a 2017 report titled The incredible shrinking universe of stocks, Credit Suisse said that Wall Street listings declined by around 50% between 1996 and 2016, from 7,322 to 3,671.
Markets have always had turnover. But there is now a dearth of new companies joining, of initial public offerings (IPOs). There are tech companies joining – of which more in a moment – but even so, the number of IPOs fell by 80% between 2000 and 2016, according to The incredible shrinking universe of stocks. This is mirrored by investor activity. Share trading today is largely made up of people buying and selling shares to each other in the secondary market. The capital does not go to new companies; it goes to other investors.
Data compiled by Bloomberg, however, says the opposite. On 13 March 2021 it revealed that global IPOs had raised a record U$162.4bn in 2021, the most ever at that point of the year. But most of these are Asian firms and although they tend to list on Wall Street, the companies don’t have much of a US connection. Stock markets in Indonesia, South Korea, India, Singapore and, of course, China are likely to make inroads into what is currently American domination.
"Companies don’t need to go public anymore because there are abundant supplies of capital outside the exchange"
This does not matter to Western capital providers because they can easily deal in these countries, in a way that simply was not possible before technology. And they are already providing capital to private companies there, because that is where the growth is, and they seem happy with the regulatory requirements. They are using the internet.
Companies don’t need to go public anymore because there are abundant supplies of capital outside the exchange. In the past no one knew enough detail about private companies because they had no coherent figures. Private companies were just that: private. These days, however, if the owners want to, they can use technology and the internet to make their sales and investment pitch around the globe. It only takes seconds.
This means the stock exchange is virtually redundant in its traditional form. It was intended to supply capital so companies could embark on stellar growth. The stellar growth is still there, but much is in private companies.
These get their capital from hedge funds, special purpose acquisition vehicles, private equity, multinationals, and some investment trusts. People normally only use an IPO to help the owners cash out, which is removing capital. The UK government asked Lord Jonathan Hill to establish how things might be improved for IPOs. He published his UK listing review report in March 2021, but other than a recommendation that regulatory standards be loosened, there is little new of note. This is not his fault – the world has changed.
"The world is democratising. It just needs the stock exchange to embrace it"
Even the London Stock Exchange Group (LSEG) does not seem too bothered by listings or their dearth. Its business has moved elsewhere, to the supply of data and analytics. Its 2020 annual report shows that 66% of group revenue currently comes from data, and this figure is forecast to rise following the recent acquisition of Refinitiv.
So where does this leave the exchange? There has recently been a surge in share-buying from new retail investors, largely millennials. But they have been born with the internet; they are all digitally savvy. They use their mobile for everything.
If they want to know something, they look on Google. So the internet is where the stock exchange needs to go, and there are only two real problems. One is regulation, though that can be solved by technology. The other is to avoid fraud by settling on delivery versus payment, meaning shares and cash would exchange in real time around the world.
People used to be put off by the cost and complexity of share trading. Brokers, wealth managers, market makers and regulatory complexity make it difficult for a beginner – and they all take a slice of your money. But now there are very low-cost trading platforms and investment chat rooms, which make it easy, cheap and global. The world is democratising. It just needs the stock exchange to embrace it.
This article was originally published in the June 2021 edition of The Review.
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