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Rip-off Britain?

Cost remains the main bugbear of UK private investors. The 'going rate' for a share trade in the UK is around £12. In the US, it's $12 or around £7.50. A European Commission study in 2009 found that wholesale equity trading costs in the UK were among the highest in Europe – despite the strong level of private-investor participation in the UK market. "There are many reasons that are linked to the infrastructure and the way trades are processed that lead to a higher cost of trading in the UK compared with other European countries like Italy and the US," explains Nicolas Bertrand, head of equity and derivatives at the London Stock Exchange.

"The system in the UK is pretty complex – orders go to Crest for the netting, then to LCH [the London Clearing House] for clearing and back to Crest for settlement," he adds. "All these post-trade activities are definitely increasing the total cost of trading. It's something we are looking to address," says Mr Bertrand. He refuses to be drawn on whether the stock exchange plans to bring clearing and settlement 'in house', as many have speculated, and as many European exchanges such as Deutsche Börse have already done.

And there are arguably too many middle men at the front end of the share-trading process. These are the market makers who constitute the Retail Service Provider (RSP) network, and who process most share trades from individual investors. That’s in contrast to most European markets, where private investors are plugged straight into the exchange itself. "When you look at the Italian market, that market is characterised by a high level of activity by private investors directly on the order book," says Mr Bertrand. "The direct market access route here hasn't developed in the right way." The exchange is trying to remedy that by slashing the fees it charges brokers to send client orders straight to the order book. However, he's keen to stress that the exchange doesn't want to cut RSPs out of the picture altogether. "The UK has a very large proportion of small cap stocks – we need that market-maker activity to provide the liquidity for small-cap stocks. We are here to provide a level playing field for all investors and we should support different ways of accessing the market."

The bond experiment

The exchange has also been trying to woo private-client stockbrokers with bonds. The group launched its order book for retail bonds (Orb) in February, but progress has been mixed so far. "Trading volumes currently are low," admits Mr Bertrand. "But what is really interesting to highlight is the number of products available and the issuers who are supporting the market." Orb now offers 142 gilts, corporate bonds, sovereign issues and supranational bonds. Mr Bertrand stresses that it will take time for the market to develop fully. "The retail bond market of Borsa Italiana [also part of the LSE Group following a merger in 2007] is the most active of its kind in Europe, but it took two to three years to really establish the market and get trading volume."

Another priority in 2011 is an overhaul of its trading platform. The ageing SETS electronic order book is to be replaced with a system that Mr Bertrand says will be among the fastest in Europe and will keep it competitive relative to the multilateral trading facilities (MTFs) that have been nibbling away at its market share over the past few years. These firms, such as Chi-X and BATSEurope, run super-fast computer systems, have much lower cost bases and now account for around 40 per cent of all blue-chip share trades. However, the migration from SETS has already been postponed once – a reminder that nothing can be taken for granted.

The cost of trading