securities dealing 2005.qxp

ECURITIES

EALING

City Business Series

SUMMARY

The UK is a leading centre for securities dealing. Its substantial domestic
market in equities and bonds is complemented by London’s major role as a
centre for trading in international bonds and foreign equity.

Equity markets The market value of equities on the main market of the
London Stock Exchange rose for the second year running and totalled
£1,496bn at the end of May 2005. This was up 10% on the end-2003 total but
still 18% below the record 1999 end year total. In addition to the 1,416
companies trading on the main market, there were 1,197 companies quoted
on the Alternative Investment Market (AiM) with a market value of £36bn.

London’s importance as a centre for equity trading is illustrated by:

Its 45% share of global foreign equity trading in 2004 and 43% in the
first five months of 2005. The 340 foreign companies listed on the
London Stock Exchange in May 2005 was second only to New York.

Its 8% share of the global equity market (worth $36.6 trillion at end-May
2005). The record domestic turnover on the London Stock Exchange of
£2,316bn in 2004 accounted for around 7% of global turnover.

London having the second highest equity market capitalisation in
relation to GDP (after the US) of the largest countries with 133% in
2004.

Bond markets The outstanding value of bonds of UK-based issuers at the
end of 2004 was £1,680bn, up 16% on the previous year and more than three
times the total a decade earlier. A major feature of the UK market has been
the movement away from gilts into non-government bonds. Over the past
decade the share of international bonds increased from 30% to 53% of the
UK total while the share of domestic corporate and financial
companies’ bonds grew from 23% to 26%. During this period the share of
gilts fell from 47% to 21%.

London is a leading centre for the trading of international bonds.
Bookrunners based there are estimated to account for about 60% of the
primary and 70% of the secondary market. The outstanding value of
international bonds of UK-based issuers reached £896bn at the end of 2004,
nearly twice the value in 2000. Eurobonds accounted for around three-
quarters of this.

Contribution to the economy Securities dealing generated 0.1% of GDP in
2004. Operating profits of securities dealers totalled £2.3bn in 2004,
recovering from a loss of £150m in the previous year. In 2003 net exports
increased 6% to £3,309m. The number of individuals in the UK authorised to
conduct customer trading in securities totalled 8,045 in April 2005.

International Financial Services, London

29-30 Cornhill

London, EC3V 3NF

Tel: +44 (0)20 7213 9100

Fax: +44 (0)20 7213 9133

E-mail: enquiries@ifsl.org.uk

www.ifsl.org.uk

includes UK listed and AIM companies

Source: London Stock Exchange

Chart 1 UK equity market value

market capitalisation

£bn (bars)

Number of

companies (line)

500

1,000

1,500

2,000

5/2005

2003

2001

1999

1997

1995

1,400

1,600

1,800

2,000

2,200

2,400

2,600

July 2005

UK EQUITY MARKET

The value of the UK equity market increased for the second year running in
2004. The recovery was reflective of a worldwide trend resulting from an
improved economic outlook, acceleration in earnings growth and an increase
in investor confidence. Equity markets fell between 1999 and 2002
following a period of high growth in the 1990s.

Size and structure of the UK equity market

The London Stock Exchange plays an important role in maintaining
London’s position as one of the world’s leading financial centres. In addition
to being the main exchange for the trading of UK securities it is also the
world’s most international equity market with more international trading than
any other exchange. London is also the home to Virt-x, the cross border
platform for trading major European stocks. Major participants in UK equity
markets include investment banks and securities houses, institutional
investors, fund managers and individuals.

Market capitalisation The market value of equities issued by 1,416 UK
companies listed on the main market of the London Stock Exchange totalled
£1,496bn in May 2005 (Chart 1). This was up 10% on the end-2003 total but
still 18% below the record 1999 end year total. In addition to the companies
trading on the main market, there were 1,197 companies quoted on the
Alternative Investment Market (AiM) with a market value of £36bn.

The flow of new and further issues has gradually decreased since 2000 (Chart
2). The £16.1bn raised in 2004 was up a fifth on the previous year but down
a third from 2000. New and further issues in the first five months of 2005
totalled £5.4bn. Equitisation or share buybacks and delistings have exceeded
net issuance by an average of 10% a year over the past 15 years according
to Lehman Brothers. UK companies bought back 1.6% of their shares in
2004.

Concentration

The UK equity market is heavily dominated by large

companies (Table 1). In May 2005, 109 companies, each with a market
valuation in excess of £2bn, accounted for four-fifths of market
capitalisation. This indicates the dominant influence on market movements
of companies in the FTSE-100. The five largest companies (Table 3)
accounted for around 30% of the total. At the other end of the scale, the
smallest 1,393 companies, each with a market value of less than £50m, made
up more than half of all those quoted but only 1% of market capitalisation.

Industry classification The majority of UK quoted companies by market
value are drawn from services (mainly banks and telecommunications), oil
and gas and manufacturing (Table 2). These sectors have a high proportion of
large firms which account for the bulk of activity. For example, British
Petroleum which is the largest company on the London Stock Exchange
accounted for 7.4% of the total market value and 4.9% of turnover in 2004
(Table 3).

Companies in the telecommunications and information technology sectors
have seen their share of market value and turnover fall in recent years.

July 2005

Securities Dealing

Source: London Stock Exchange

Market
value range
£m

< 2,000
500-2,000
50-500
< 50
unvalued/suspended

Number

companies

109
167
716

1,393

2,453

Table 1 Distribution of UK Main Market and
AIM companies by equity market value

share

4
7

29
57

Equity

market

value

£bn

1,236

160
115

1,496

share

81
11

8
1

May 2005

June 2005

Source: London Stock Exchange

Chart 3 FTSE index movements

end year,
index 1999=100

100

2005

2003

2001

1999

1997

1995

FTSE-100

FTSE-AIM

FTSE
Techmark 100

first five months

Source: London Stock Exchange

Chart 2 New equity issues by UK listed
companies

£bn

Further issues
Other new companies

Privatisation

2005

2003

2001

1999

1997

1995

Between 1999 and first five months of 2005, telecommunication services’
share of market capitalisation nearly halved from 16.6% to 8.4% while
market turnover fell from 15.2% to 6.7%. As Chart 3 shows, the value of
technology related companies has fallen significantly since its peak in 1999.
Financial services companies have increased their share of the market in
recent years. This was partly due to mergers and acquisitions, particularly
within the banking sector.

Dealing in UK equities UK equity turnover reached a record £2,316bn in
2004 up more than a quarter on the previous year (Chart 4). This was nearly
four times the level a decade earlier. Customer trading has been the impetus
behind growth in the 1990s having increased steadily to reach a record 71%
of market turnover in 2000. Since 2000 however, growth in intra-market
trading has outpaced growth in customer trading. This was largely due to an
increase in arbitrage and other technical trading.

The SETS electronic order book, which trades the 200 or so most liquid UK
securities including all FTSE 100 securities, has been central to the rapid
growth of trading activity on the London Stock Exchange (Chart 5). Trading
in all FTSE 250 securities not already traded on SETS and some Irish and
other securities is facilitated by SETSmm. Trading in all other London Stock
Exchange securities is facilitated by a screen-based quotation system called
SEAQ. For AIM securities, a hybrid market of quotes and orders is used.
Trading of international securities is facilitated by the international Order
Book and the International Retail Service.

Prior to 2001, the size of intra-market trades was higher than customer trades
(Chart 6). Following the introduction of SETS in 1997, which brought greater
speed and efficiency to the market, the size of intra-market trades halved and
has since continued to fall reaching 10,700 shares per bargain in the first five
months of 2005. Customer trades were comparatively stable during this
period and averaged 18,500.

Dealing business on the AIM totalled a record £18.1bn in 2004, around three
times up on the previous year. The number of companies listed nearly
doubled in 2004. The AIM accounted for 0.3% of all turnover in UK equities
and 3.0% of bargains in 2004 reflecting the smaller size of transactions
traded on this market. Turnover on the AIM totalled £10.3bn in the first three
months of 2005.

Equity markets also trade in derivatives but coverage of this is excluded from
this report as this is a subject covered in IFSL’s report - Derivatives.

Companies

The most actively traded equities are typically the largest

companies. Trading in FTSE-100 companies represented four-fifths of UK
equity turnover between January and May 2005 compared with 57% in 1996.
Companies with the highest turnover on the London Stock Exchange in 2004
were Vodafone Group and British Petroleum (Table 3).

Client profile The bulk of UK shares are held by institutional investors such
as pension funds and insurance companies. Their share has fallen somewhat
in recent years while the share of overseas investors has increased.

July 2005

Securities Dealing

first five months of 2005

Source: London Stock Exchange

Chart 4 Turnover of UK equities on the
London Stock Exchange

£bn

500

1,000

1,500

2,000

2,500

2005

2003

2001

1999

1997

1995

Intra-market
Customer

Source: London Stock Exchange

Services
- Non-financial
- Financial
Consumer goods
Mineral extraction
Information tech.
Utilities
General industrials
Basic industries
Total

£bn

800
381
419
276
252

16
64
37
52

1,496

Table 2 Industry classification

share

53
25
28
18
17

1
4
2
3

100

£bn

118

62
56
36
92

10
19
30

606

share

46
27
20
14
10

1
4
3
4

100

Market value

May 2005

Turnover

Jan-May 2005

Source: London Stock Exchange

Chart 5 Order book trading

Value (£bn),
(bars)

200

400

600

800

1,000

2004

2003

2002

2001

2000

1999

1998

Bargains (million),

(line)

Major investors in UK shares include:

Institutional investors hold the majority of UK listed equities. At the end
of 2003 they accounted for over a half of UK ordinary shareholdings or
over £750bn. The largest holders were pension funds and insurance
companies. However, their share, which mostly ranged between 40%
and 55% over the past two decades, fell to less than a third at the end of
2004. Over the past decade shareholdings by brokers and securities
dealers, venture capital companies and unauthorised unit and investment
trusts increased from 1% to 11%

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 14% between 1997 and 2004. This, however, does not
include shareholdings held indirectly through Personal Equity Plans
(PEPs) and Individual Savings Accounts (ISAs). Although the
proportion held by individuals has fallen, shareholders have increased in
number from 4m to over 12m since 1981.

Overseas investors

The proportion of UK ordinary shares held by

overseas investors increased from 4% in 1981 to almost 33% between
2000 and 2004. 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

July 2005

Securities Dealing

Source: Office for National Statistics

Chart 7 UK share ownership

% share

UK individuals

Overseas

2004

2003

2002

2001

2000

1997

1993

1989

1981

1975

Other

UK institutions

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:

- Dynamic, transparent and highly liquid markets with firm but flexible regulation;

- 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 such as order-driven trading at the London

Stock Exchange have helped to reduce the costs of execution;

- The UK has the third largest fund management industry and London is the world’s

largest equity fund management centre. The expertise of this industry has helped to
bring additional business in securities dealing to London;

- London is the most important centre for privatisation advice;

- The large pool of skilled labour and the associated depth of expertise in international

financial markets concentrated in central London, is unparalleled in other major
financial centres;

- A central position between the US and Asian timezones;

- Perception of a proportionate approach to its regulatory climate, which facilitates

innovation.

- Strong reputation and experience, built up over several centuries.

Source: London Stock Exchange

BP
HSBC Holdings
Vodafone Group
Glaxosmithkline
Royal Bank of Scot. Grp
Shell Transp. & Trading Co
Barclays
Astrazeneca
HBOS
Lloyds TSB Group

Market

value

£bn

110

98
94
72
55
43
38
33
31
26

Table 3 Largest UK companies

Turnover

£bn

114

116

95
63
67
54
58
34
61

% of

total

market

value

7.4
6.6
6.3
4.8
3.7
2.9
2.5
2.2
2.1
1.7

% of

total

market

turnover

4.9
4.2
5.0
4.1
2.7
2.9
2.3
2.5
1.5
2.6

December 2004

first five months of 2005

Source: London Stock Exchange

Chart 6 Shares per bargain

Thousands of
shares per bargain

5/2005

2003

2001

1999

1997

1995

Customer trading

Total

Intra-market
trading

July 2005

Securities Dealing

FTSE-100 companies (88% in 2003) which feature slightly less
prominently in portfolios of institutional investors (83%) and
individuals (59%).

Virt-x was launched in 2001 and is the product of the merger between
Tradepoint and SWX Swiss Exchange. It was created to facilitate direct
trading in all major European indices on one exchange, with one rule book
and within a single regulatory environment supervised by the Financial
Services Authority. In the first five months of 2005, 4.8bn shares worth
around £210bn were traded on Virt-x.

EQUITY MARKETS WORLDWIDE

Domestic equity markets

The global equity market had a market

capitalisation of $36.6 trillion at end-May 2005 (Charts 8 and 9) slightly
down from end-2004 and up 17% from 2003. Equity markets fell between
1999 and 2002, particularly stocks in the technology and telecommunications
sectors, following a period of rapid growth in the 1990s.

US companies account for nearly a half of the world’s equity market, a
reflection of the large size of the US economy. Although the Japanese stock
market was the biggest in the world in 1989, the fall in prices there meant that
in 2005 its share fell to around 9% of the total. The London Stock Exchange
was the next largest market with market capitalisation of $2.8 trillion in May
2005 or 8% of the global total (Table 4).

In relation to GDP, London had the second highest market capitalisation of
the largest countries with 133% in 2004. This was several times that of other
large European countries and second only to the US (combining New York
and Nasdaq) with 139%. Switzerland and Hong Kong had higher market
capitalisation in relation to GDP (above 200%), however the market value of
exchanges in these countries was one-third of London’s.

The volume of turnover in relation to market value in 2004 was highest in the
UK and Germany. Activity was most intense on the Nasdaq with its
concentration of technology stocks with turnover more than two times the
market value. Turnover as a proportion of market value on the London Stock
Exchange totalled 184% compared with
the global turnover average of 114% in
2004. Over the past decade, this ratio
ranged between a low of 63% in 1995
and a high of 159% in 2000.

The concentration of the top 10
companies by value and turnover on
major exchanges in 2004 was greatest in
Switzerland (70% and 76%
respectively). In London the largest 10
companies accounted for 40% of the
value and 33% of turnover. This
concentration was more than on most
other major exchanges.

May 2005

Source: World Federation of Exchanges

Chart 8 Global equity markets

$ trillion, domestic market
capitalisation
(bars)

$ trillion,

domestic turnover

(line)

2005

2003

2001

1999

1997

1995

includes both New York and Nasdaq;

includes both Tokyo and Osaka

in the compilation of the WFE figures trading

done away from an electronic order book ('negotiated trades') is halved for comparison purposes
Source: World Federation of Exchanges, OECD

New York
Tokyo
Nasdaq
London
Euronext
Deutsche Börse
TSX Group
Others
Total

Market

value

$bn

12,795

3,401
3,398
2,772
2,315

1,138

1,179
7,404

36,602

Table 4 Domestic equity markets

----------------------------------------------2004----------------------------------------------

% of

total

34
10
10

8
7

100

Domestic

turnover

$bn

10,528

3,188
7,985
2,940
2,425

1,404

650

6,853

36,098

% of

value

83
90

226
103

117

55
93
97

Number of

domestic

companies

1,834
2,276
2,889
2,486

999

660

3,572

19,611
35,417

Market

cap of

top 10, %

20
18
30
40
33

n/a

Turnover

value of

top 10, %

10
21
29
33
29

n/a

Value as

% of

GDP
139

125

139

133

120

60
99

------May 2005------

Source: World Federation of Exchanges

Chart 9 Market capitalisation of major
Exchanges

$bn

2,000

4,000

6,000

8,000

10,000

12,000

14,000

May 2005

2002

1999

Deutsche Börse

London

Nasdaq

Tokyo

NYSE

July 2005

Securities Dealing

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. In Europe, a number of alliances and mergers have
taken place. Over the next few years there may be further consolidation of
European Securities exchanges.

In the UK, The Office of Fair Trading has referred the proposed acquisition
of the London Stock Exchange plc by Deutsche Börse AG or Euronext NV
to the Competition Commission. The Competition Commission will decide
whether either acquisition may be expected to result in a substantial
lessening of competition within any market or markets in the UK for goods
and services. The report is expected to be published in September 2005.

Markets for foreign equities Global turnover in foreign equities totalled
$5.0 trillion in 2004, up 45% on the previous year (Table 5). Trading totalled
$2.3 trillion in the first five months of 2005. Growth since 2003 follows three
years of decline in the volume of trading. The 340 foreign companies listed
on the London Stock Exchange in May 2005 was second only to the NYSE.
Foreign companies trading in London generated turnover of $2.2 trillion in
2004, up 52% on the previous year. London maintained its share of around
45% during this period. In the first three months of 2005 London’s share
totalled 43%.

The combined 32.0% share of the New York Stock Exchange and Nasdaq is
nearly a third below its 1997 peak of 45.8%, mostly due to a substantial drop
in trading on the Nasdaq. The Swiss exchange Virt-x which is based in
London has seen a significant increase in its share of trading over the past two
years.

Over 50% of foreign equity turnover in London was undertaken in
companies based in Europe. French and German equities formed the largest
single blocks with 11% and 9% respectively (Table 6). Trading in Japanese
equities halved to 10% between 1995 and 2004. The share of trading in US
stocks increased from 6% to 22% during this period.

Equity markets for small companies Shares and other equities are an
important source of finance for industrial and commercial companies.
Demand for bank borrowing is more volatile, influenced both by the
economic cycle and the level of interest rates. Smaller companies tend to be
more dependent on bank borrowing, although the formation of second tier
markets such as the AIM and third tier OTC markets provide additional
sources of equity capital for these companies. These markets have simpler
listing requirements and regulatory regimes than major stock exchanges. In

Table 5 Markets for foreign equities

Switzerland turnover includes shares traded on Virt-x which

is based in London

London figures have been halved for non Order Book trading

for comparison purposes
Source: World Federation of Exchanges

London
New York
Switzerland
Nasdaq
Germany
Euronext
Others
Total

No. of

foreign cos.

listed (May)

340
454
119
330
315
135
948

2,641

----- 2004 -----

% of

global

43
21
18
10

1
3
5

100

Turnov.

$bn

991
476
407
242

20
60

120

2,316

------ Jan - May 2005

------

% of

global

45
20
15
12

3
1
5

100

Turnov.

$bn

2,229

976
738
618
137

240

4,986

Table 6 London Stock Exchange turnover in
foreign equities

Source: London Stock Exchange

Country of origin
France
Germany
Italy
Netherlands
Spain
Other Europe
Europe
US
Japan
Other countries
Total

% share
London/World

1995

127

79
47
72
22
95

493

169

791

2004

255
224

173
133
353

1,237

531
249
386

2,403

1995

16
10

6
9
3

12
62

21
10

100

2004

9
4
7
6

15
51
22
10
16

100

% share

£bn

Foreign equities

To gain access to foreign capital many companies seek a listing on other national
exchanges in addition to their own domestic stock market. Companies can list on a foreign
markets through: direct listings, where a company lists their equity directly on a foreign
market either as a ‘primary’ or ‘secondary’ listing; or through depositary receipts which
are tradable securities held in the custody of a depositary bank in the issuers’ home
market which can be traded independently from the underlying shares.

May 2005

Source: London Stock Exchange

Chart 10 Alternative Investment Market (AIM)

market value
£m (bars)

Number of

companies (line)

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005

2003

2001

1999

1997

1995

200

400

600

800

1,000

1,200

July 2005

Securities Dealing

2004 London (AIM and main market) accounted for 73% of European IPOs
by number. This was up on 63% in the previous year and compares with a fall
in Euronext’s share from 19% to 11%.

The AIM was introduced in 1995 as a second tier market for small or young
companies whose shares are not traded on the main exchange. AIM has
become the world’s leading small-cap market. At the end of May 2005 there
were 1,197 issuers listed on AIM (including 144 from outside the UK) with
a combined market capitalisation of £36bn (Chart 10). There is also a third
tier market in London - OFEX, which is an OTC market that is sometimes
used as a stepping stone to an exchange trading platform such as the AIM or
the Official List. On the London Stock Exchange, smaller companies are
categorised in the FTSE smallCap or FTSE Fledgling indices. There is also
the All Small market index, which combines the FTSE Fledgling and
SmallCap indices.

Other exchanges for small companies in Europe at the end of 2004 included
Nuevo Mercad in Spain, SiTech in Poland and Nuovo Mercato in Italy
although they are much smaller in terms of market capitalisation and
number of listed companies compared to the AIM (Table 7). Over the past
few years a number of exchanges for small companies in Europe have closed
down operations including Nasdaq Europe and the German Neuer Markt. In
April 2005, the Irish Stock Exchange opened the Irish Enterprise Exchange,
a junior market for smaller companies and in May 2005 Euronext opened a
growth market in Paris called Alternext.

Equity market returns worldwide

Over the long term, equities have

generally produced higher returns than other forms of investment such as
bonds, property or cash. The higher returns compensate for greater
uncertainty. Long periods can occur when markets under or over-shoot the
assumed returns. One such period was between 1999 and 2002 which saw a
decline in the value of most equity markets, particularly those with a
significant number of technology related stocks (Chart 11). This followed a
period of high growth in the 1990s. Equity markets have recovered since but
are still below the peak levels of 1999.

As shown in Table 8, the real average return on UK equities of 6.3% between
1963 and 2004 was higher than the return on gilts (2.7%) and cash (2.4%).
Between 1995 and 2004 however, UK property investments generated the
highest return (8.5%), followed by gilts (7.4%), index-linked bonds (5.6%)
and UK equities (5.4%).

US equity markets produced the highest returns in terms of sterling between
1995 and 2004 totalling 9.5% (Table 9). This was followed by France (9.3%),
Switzerland (9.0%) and the UK (8.1%).

Table 8 Long-term nominal and real returns

Source: UBS Global Asset Management

1963-2004 % p.a. return

UK equities
Gilts
Cash
1995-2004 % p.a. return
UK equities
Overseas equities
Property
Index-linked
Gilts
Overseas bonds
Cash

Nominal

12.8

9.2
8.9

8.1
5.9

11.2

8.3

10.1

5.4
5.3

Price

inflation

6.5
6.5
6.5

2.7
2.7
2.7
2.7
2.7
2.7
2.7

Real

6.3
2.7
2.4

5.4
3.2
8.5
5.6
7.4
2.7
2.6

Table 7 Equity markets for small companies

Source: Federation of European Stock Exchanges,
London Stock Exchange

April 2005

New Market (NE.HA.)
Nuovo Mercato
IEX
Techmark & AIM
of which AIM
OMX (NM List HSE)
Nuevo Mercad
SiTech

Country

Greece

Italy

Ireland

UK
UK

UK/Sweden

Spain

Poland

Listed

compan.

1,327
1,166

12
13
34

Market

Capital.

7,762

526

606,670

67,830

348

14,956

8,674

June 2005

Source: NYSE, NASDAQ, London Stock Exchange, Yahoo

Chart 11 World Indices

index 1995=100

100

150

200

250

300

350

400

2005

2002

2000

1998

1996

1994

1992

1990

Nasdaq
Composite

Dow
Jones

UK FT
All-share

Nikkei 225

Table 9 Equity market returns worldwide

Source: UBS, Relevant market indices from Datastream

US
Japan
UK
Germany
Switzerland
France

2002
-29.9
-18.1
-22.7
-38.6
-19.5
-26.3

2003

15.1
22.8
20.9
47.2
20.2
27.5

2004

3.3
7.8

12.8

7.5
7.2
9.3

Annual returns in £

10-year

average in £

9.5

-4.0

8.1
6.0
9.0
9.3

BOND MARKETS IN THE UK

The UK bond market has grown markedly during the past decade. The
nominal value of outstanding bonds of UK-based issuers at the end of 2004
was £1,680bn, up 16% on the previous year and more than three times the
total a decade earlier (Chart 12).

A major feature of the UK market has been the movement away from gilts
into non-government bonds. This was partly due to the growth in
international bond issuance in the UK. The outstanding value of non-
government domestic bonds overtook gilts for the first time in 1999 as shown
in Chart 13.

Over the past decade the share of international bonds increased from 30% to
53% of the UK total while the share of domestic corporate and financial
companies’ bonds grew from 23% to 26%. During this period the share of
gilts fell from 47% to 21%.

Size and structure of the bond market in the UK

Government securities The gilt-edged market allows the Government to
raise money by issuing British Government bonds, known as gilt-edged
securities or gilts. Government securities are mainly issued to finance the
difference between Government income and expenditure, or to re-finance
maturing debt. Until 1998, the Bank of England had responsibility both for
issuing new gilts and for the financial regulation of the gilts market. Since
then, the primary market in gilts has been controlled by the Debt
Management Office (DMO), an executive agency of HM Treasury. The
responsibility for the financial regulation of the gilts market lies with the
Financial Services Authority.

The outstanding value of gilts in issue reached £321bn at the end of 2004, up
10% on 2003 and 72% more than in 1994. The outstanding value of gilts was
relatively stable between 1997 and 2001 due to a surplus in government
finances but issues increased between 2002 and 2004 as the deficit in
government finance widened. Overseas holdings of gilts were relatively
steady between 1996 and 2004 at around a fifth of the total.

Other UK fixed interest securities As well as gilts, there are a variety of
other domestic fixed interest securities that can be traded on the London
Stock Exchange.

These include fixed interest convertible and preference

shares and other bonds issued by companies, local authorities and banks. The
remaining fixed interest securities include Commonwealth government
stocks and some preference and convertible shares.

The UK corporate bond market is smaller than in some other developed
countries because of the tendency of UK corporations to raise debt finance
through the banking system rather than through the markets. The outstanding
value of corporate bonds reached £214bn at the end of 2004, nearly ten times
the level a decade earlier. The outstanding value of bonds issued by
commercial banks and other financial institutions totalled £218bn at the end
of 2004, slightly up on the previous year.

July 2005

Securities Dealing

1 '

Corporate', 'Financial' and 'Government' only include

domestic bonds
Source: Bank for International Settlements; IFSL estimates

Chart 12 Size of the bond market in the UK

£bn, nominal value
outstanding by resident of issuer

200

400

600

800

1,000

1,200

1,400

1,600

2004

2002

2000

1998

1996

1994

International

Government

Financial

Corporate

Source: Bank for International Settlements; IFSL estimates

Chart 13 UK domestic bond market
by type of bond

% share of total domestic bonds
value outstanding

100

2004

2002

2000

1998

1996

1994

Government

Financial and

corporate

68%

55%

45%

32%

Source: Bank for International Settlements; IFSL estimates

Chart 14 UK bond market by currency

% share of total
value outstanding

100

2004

2002

2000

1998

1996

1994

Sterling

Other currencies

70%

55%

45%

30%

July 2005

Securities Dealing

International bonds include eurobonds and foreign bonds and are
instruments which are issued or traded outside the country of their currency
(Tables 10 and 11). The market for international bonds in the UK is distinct
from the UK bond market. The eurobond market in the UK has the status of
a Designated Investment Exchange and is organised by the International
Securities Markets Association (ISMA) comprising international banks and
brokers. These bonds are typically traded over-the-counter. London is a
leading centre for trading international bonds. According to IFSL estimates,
bookrunners based in London account for about 60% of eurobonds issued
and 70% of the secondary market. Overall, the outstanding value of
international bonds of UK-based issuers reached £896bn at the end of 2004,
up more than a fifth on the previous year and nearly twice the value in 2000.
Eurobonds accounted for around three-quarters of this.

Dealing in UK bonds An active market exists in Government securities,
with turnover totalling £2,994bn in 2004 (Chart 15) up 17% on the previous
year. Bond market activity increased since 2000 as some investors increased
their investments in bonds following declines in equity markets. The previ-
ous period, in the mid 1990s, was a period of declining turnover due to the
low level of government issuance and a fall in intra-market trading.

Primary dealing in government securities is handled by the 16 Gilt-Edged
Market Makers (GEMMs). In 1999, control of the Bank of England’s
settlement systems, Central Gilts Office (CGO) and Central Money Markets
Office (CMO), was transferred to CRESTCo. Settlement of gilts and non-
British government sterling debt was absorbed into the CREST system in
July 2000 and the CGO office was closed.

Other securities traded on the London Stock exchange generated turnover of
£49bn in 2004. This was mainly in preference shares and convertables.
Trading levels were low amongst other bonds and debentures.

BOND MARKETS WORLDWIDE

The global bond market has more than doubled in size during the past decade.
Its total outstanding value exceeded $58 trillion in December 2004, up 13%
on the previous year and more than twice the level a decade earlier
(Chart 17). The bulk of the market is in domestic government bonds although
by value government bonds share of the world bond market fell to 37% at the
end of 2004 from 45% a decade earlier. By contrast international bonds
increased their share from 9% to 24%. The share of the corporate bond
market, where bonds are issued by companies in their own country and local
currency, fell by 7% during this period to 39%.

The US is the largest market for bonds with 40% of the global outstanding
value. It was followed by Japan with 15%, and Germany with 7%. The large
share of the US and Japanese markets largely stems from the size of their
individual economies as well as the high level of Government borrowing
over time. In Europe, public sector debt is substantial in Italy, Germany,
France and the UK (Table 12).

As a proportion of GDP, the world bond market increased from 60% in 1990

1997 data is an IFSL estimate

Turnover includes both sides of transaction

Source: Bank of England, London Stock Exchange

Chart 15 British Government securities

Turnover, £bn

1,500

2,000

2,500

3,000

2004

2002

2000

1998

1996

1994

200

250

300

350

Value outstanding, £bn

Value

outstanding

Turnover

1997 data is an IFSL estimate

Turnover includes both sides of transaction

Source: London Stock Exchange

Chart 16 Turnover of British Government
securities

£bn

500

1,000

1,500

2,000

2,500

3,000

2004

2002

2000

1998

1996

1994

Customer

Intra-market

53%

43%

57%

47%

Source: Bank for International Settlements; IFSL estimates

Chart 17 World bond market

$ billion, amounts
outstanding

10,000

20,000

30,000

40,000

50,000

60,000

2004

2002

2000

1998

1996

1994

International

Domestic

to 117% at the end of 2004. Amongst more developed countries, the ratio
between the value of the bond market and GDP was highest in Japan (179%),
followed by the US (164%), Italy (135%) and France (98%). The
outstanding value of UK government bonds, particularly in relation to GDP,
is amongst the lowest in the EU at 67%.

The market for debt securities consists of bonds and notes and money
market instruments:

Bonds and notes make up the bulk of the global market in debt securities
with nearly three-quarters of the total. Nearly four-fifths of this was in
domestic securities. The structure of individual domestic markets differs
markedly, mostly averaging 10-year maturities. The liquidity of longer
term securities tends to be smaller, although in the US, UK and France
bonds with longer term maturities are also issued and freely traded on the
market. The UK Treasury sold 50-year government bonds in May 2005,
its longest maturity sale since 1960.

Money market instruments The money market is an informal network
which has no physical site where wholesale funds are borrowed and lent
for short periods. The London Money Market facilitates trading in Bills
of Exchange, Certificates of Deposit, Treasury Bills, and Commercial
Paper. Around one-quarter of global debt securities amounting to $14bn
are in money market instruments. This has mostly been generated by the
money centre financial markets in New York, Tokyo, Frankfurt and
London where such instruments are actively traded between government
securities dealers, banks, other financial institutions and managers of
money market funds.

Secondary dealing The US bond market is the largest securities market in
the world. An estimated $500bn is traded daily on this market. Despite the
size, the US bond market operates without a central exchange, instead
operating as an over the counter market with hundreds of market makers.
Bonds are also traded on a number of exchanges. The value of bond turnover
on the London Stock Exchange totalled $834bn in the first four months of
2005. In Europe, this was exceeded only by trading on the BME Spanish
Exchanges ($1,019bn). London is the top centre for trading international
bonds with around 70% of the global turnover.

International bond market

The international bond market is a wholesale

market where around 90% of bonds are held by institutional investors such
as insurance companies, pension funds and mutual funds. Bonds are traded
on the secondary market, but are more often purchased and held to maturity.
Issuers mostly include large companies, national and local governments and
international organisations.

The international bond market is attracting an increasing volume of issuance
and trading activity, much of which is transacted in the UK. Key features of
this market include:

Supranational character with increasing convergence of markets as
national or regional boundaries gradually break down;

July 2005

Securities Dealing

Table 12 Domestic debt securities by
nationality of issuer

Source: Bank for International Settlements; IFSL estimates

$bn outstanding, 2004

Total

19,187

8,867
2,226
2,372
2,135
1,505

758
872
486

6,105

44,513

Public

5,526
6,837
1,193
1,495
1,176

674
556
451
353

3,442

21,703

Financial

11,078

1,241

901
635
696
419
104
238

1,933

17,333

Corporate

2,581

789
132
242
264
411

184

732

5,477

US
Japan
Germany
Italy
France
UK
Canada
Spain
Belgium
Others
World

Source: Bank for International Settlements; OECD

Chart 18 Relative size of bond market

Value of bond market based in
issuers country of residence
as % of GDP, end-2004

100

120

140

160

180

International
Domestic

Germany

France

Italy

Japan

85%

15%

68%

32%

45%

55%

20%

80%

98%

45%

55%

Table 10 International debt securities
connection with bond markets

Source: Based on International Securities Markets Association

Issue

No
No
Yes

Type of bond
Domestic
Foreign
Eurobond

Syndication

No
Yes
Yes

Trading

Yes
Yes
Yes

Table 11 Types of bonds

Source: International Securities Markets Association

Currency

Domestic
Domestic

Eurocurrency

Market
place
Domestic
Foreign
Euro

Issuer

Domestic

Foreign

Any

Main

market

Domestic
Domestic

Internat.

Syndicate

Domestic
Domestic

Internat.

Primary

investors

Domestic
Domestic

Internat.

July 2005

Securities Dealing

A well defined regulatory structure which facilitates trading activities;

Standard use of bearer certificates, which protect anonymity amongst
investors, in contrast to registered certificates which are utilised in the
equity markets.

The international bond market has a distinct role with respect to both the two
main types of international bonds, eurobonds and foreign bonds, as well as
domestic government bonds, issued by certain countries. The main features
of these bonds and their connection with international bond market activity
are set out in Tables 10 and 11.

The value of international bonds issued each year has increased steadily
during the past decade. Starting from around $10bn a year in the early 1970s,
issuance totalled $1,464bn in 2003 and $1,622bn in 2004. The outstanding
value of international bonds totalled a record $13,913bn at the end of 2004
(Chart 19), up a fifth on the previous year.

The growth of US dollar deposits in Europe provided the initial platform on
which the international bond market emerged. Bond issues were further
buoyed by a surge in euro-denominated issues, following the launch of the
euro in 1999. The US dollar accounted for 24% of issuance in 2004, down on
the 32% in 2003 (Chart 20). The share of euro denominated issues increased
from 57% to 59% during the same period. Sterling had the next largest share
with 9% in 2004. Advanced economies generate the vast majority of business
in international bonds. In 2004 they accounted for 93% of issuance. The UK
was the largest issuer with 20%, followed by Germany (14%) and the US
(13%).

Most of the growth in international bonds has stemmed from the private
sector. Fund-raising by this group of issuers has proceeded at a strong pace
in recent years, generally accounting for more than a half of issues. Demand
from governments, public corporations and international organisations has
been relatively stable. Straight fixed rate bonds remain the most common
form of issue with $925bn or 59% of total issues in 2002. The bulk of the
remaining issues was in floating rate notes, $644bn or 41% of the total.
Equity related bonds either in the form of convertibles or equity warrants
remain an important niche market.

Secondary dealing Secondary dealing in the international bond market has
increased over the past decade in line with the growing volume of issues and
increase in electronic trading. According to IFSL estimates, based on ISMA
and BIS data, trading in international bonds has increased nearly eight times
during the past decade to reach around $50 trillion in 2004 (Chart 22).
Straight bonds and floating rate notes made up the bulk of trading, with
around two-thirds and a third of the total respectively. Convertibles
accounted for the small remainder.

Bond market returns worldwide Factors such as the rate of inflation, the
state of government finances and monetary policy all affect returns on bonds
in different countries. Bonds are, however, primarily subject to swings in
interest rates. Upward moves in interest rates, for example, erode the value of

Source: Bank for International Settlements

Chart 19 International bond market

$bn amounts
outstanding

3,000

6,000

9,000

12,000

15,000

2004

2002

2000

1998

1996

1994

Financial

Corporate

Governments

53%

21%
26%

78%

10%

12%

Source: Bank for International Settlements

Chart 20 International bond issues by
country

$bn, issues

100

200

300

400

500

600

2004

2002

2000

1998

1996

1994

Germany

Netherlands

Source: Bank for International Settlements

Chart 21 Major international bond issuing
countries

% share of outstanding value, 2004
by residence of issuer

Others

France

Netherlands

Germany

Total: 13,913

24%

12%

37%

fixed payments to be received in the future, thereby reducing the value of a
bond. Movements in the local currency can also significantly affect bond
market returns. To reduce this risk, investors sometimes choose to hedge their
international bond investments through a forward foreign exchange contract
or through foreign exchange options.

Bonds have remained an attractive investment in recent years particularly as
large institutional investors increased their holdings in an effort to reduce
investment risk. The buoyancy has also been aided by deregulation,
privatisation and technological change. The UK bond market showed the
highest return in the ten years leading up to 2004 in sterling terms. In local
currency terms, Canada produced the highest returns during this period
followed by Japan (Table 13). Emerging and converging market bonds offer
a possibility for higher returns but with higher uncertainty. These
markets are generally more volatile and subject to swings in investor
sentiment because of less developed political, legal and financial
infrastructures.

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 the 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.

Clearing and settlement Clearing involves transmitting, reconciling and
confirming payment orders or security transfer instructions. A Central
Counterparty (CCP) enables firms to trade anonymously, removing
counterparty risk and increasing liquidity.

Settlement is the legal transfer of title to a security which normally means the
exchange of a security against money. The settlement process involves the
transfer of securities from seller to buyer, once a bargain has been struck, and
the corresponding movement of money from buyer to seller. A Central
Securities Depository (CSD) normally carries out settlement. The standard
settlement cycle for domestic equity market securities is trade date plus three
business days.

Recognised clearing houses in the UK There are two recognised clearing
houses in the UK: CRESTCo Ltd and the LCH.Clearnet.

July 2005

Securities Dealing

Table 13 Annual bond market returns

Typical long-term bonds or representative indices

Source: UBS Global Asset Management

UK
US
Japan
Canada
Australia
Germany

Local

currency

6.6

-3.5
-1.2

7.6
4.1
7.9

Pound

sterling

6.6
6.6
5.9
9.3
6.2
9.9

2004

Local

currency

8.5
5.3
1.5
8.2
6.7
5.7

Pound

sterling

8.5
8.7
9.6

10.1

8.7
9.4

1995-2004

Source: ISMA; IFSL estimates

Chart 22 Secondary dealing in international
bonds

$ trillion

2004

2002

2000

1998

1996

1994

July 2005

Securities Dealing

CREST is the recognised settlement system for domestic securities on the
London Stock Exchange. Member firms may also settle inter-office if they
wish. CREST has evolved into a major settlement system, operating in an
international market, with direct links to major European countries and the
US. In September 2002 CRESTCo merged with Euroclear to create a Pan-
European securities settlement system for equity and fixed income
transactions. A fully integrated platform which will offer access to all Group
securities through one securities account is planned for 2008. The CRESTCo
systems settled nearly 300,000 transactions a day in February 2005. Its
members hold in excess of £1,900bn of securities across the CRESTCo
systems.

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.

Other European clearing and settlements systems Despite the gradual
integration of European securities markets, its clearing and settlement system
still remains fragmented. The charges for settling cross-border trades in
Europe are several times higher than for domestic trades which represents a
major limitation on the scope for cross-border securities trading in the Union.
The pan-European settlement systems such as Clearstream and Euroclear
provide services in both domestic and international securities,
covering bonds and equities and investment funds. In addition to the
pan-European clearing and settlement systems, there remains a substantial
number of different national providers of these services. In April 2004 the
European Commission issued its second consultative Communication on
securities clearing and settlement. This includes an action plan outlining the
various initiatives necessary to achieve an integrated clearing and settlement
environment for securities trading in the EU, based on a level playing field
for the different providers of services.

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

Table 14 Largest custodians

Source: Globalcustody.net

JP Morgan
The Bank of New York
Citigroup
BNP Paribas Securities Services
Mellon Group
UBS AG
Northern Trust
Société Générale
Investors Bank Trust
RBC Global Services
Others
Total

Worldwide

assets ($bn)

10,200

9,859
6,640
3,397
3,259
2,686
2,600
1,518
1,430
1,355

21,056
64,000

Reference

date

31/03/05
31/03/05
31/03/04
31/03/05
31/03/05
31/12/04
31/03/05
31/03/04
31/03/04
31/01/05

Responsibilities of custodians

The chief responsibilities of custodians include safekeeping and various administrative
functions in respect of their clients’ investments. Under safekeeping the custodians role is
to ensure that all investments under its care are properly controlled and only released in
accordance with authorised instructions from clients. Other responsibilities cover
settlement, income collection, reporting, corporate actions, tax reclaims, cash
management, securities lending, performance measurement and fund administration.

The responsibilities of custodians have been given a higher profile with the development
of global custodians. These are typically large investment banks, securities houses and
trust companies. Global custody involves an investor depositing all his investment assets
with one custodian bank while retaining complete freedom when selecting his asset
managers. The appointed asset managers focus purely on achieving investment
performance while the global custodian adds value through his expertise in asset
administration, communicating with the asset managers to optimise the settlement process.

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. In recent years falling margins have prompted
custodians to expand their range of services to include specialist services
such as cash management, securities lending and performance measurement.

Global custodians provide clients with multi-currency, settlement and
reporting services which extend beyond the global custodian’s and client’s
homebase. They manage settlement and custody of clients’ non-domestic
securities by using a network of sub-custodians who themselves provide
custody in their own country. The global custody market is highly
concentrated as shown in Table 14. In March 2005 the top 5 global
custodians accounted for over a half of global custody assets under
management. 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 In December 2001 the Financial Services Authority (FSA)
assumed its powers and responsibilities under the Financial Services and
Markets Act 2000 and became the single statutory regulator directly
responsible for the regulation of deposit taking, insurance and investment
business. The FSA is also the umbrella body supervising the UK securities
industry having taken on in October 1997 the mantle of the Securities and
Investment Board.

The Securities and Futures Authority, now subsumed within the FSA,
regulates over 1,450 firms involved in dealing or advising in securities or
derivatives. In May 2000 the role of the UK Listing Authority was transferred
from the London Stock Exchange to the FSA.

July 2005

Securities Dealing

The Financial Services Authority (FSA)

The FSA has responsibility for overseeing the integrity of UK investment
markets. It does this by, among other things:

- Supervising exchanges, clearing and settlement houses and other market infrastructure

providers;

- Conducting market surveillance and transaction monitoring.

The FSA recognises and supervises six “Recognised Investment Exchanges”:

- The London Stock Exchange, the main securities exchange in the UK.

- Virt-x, a pan-European investment exchange launched in June 2001 as the product of the

merger between Tradepoint and SWX Swiss Exchange.

- Four derivatives exchanges: London International Financial Futures and Options

Exchange (LIFFE) International Petroleum Exchange (IPE), London Metal Exchange
(LME) and EDX London. These are described in more detail in IFSL’s City Business
Series report on Derivatives.

July 2005

Securities Dealing

The International Securities Markets Association (ISMA) is the only
international self-regulating organisation to have been established under UK
legislation. ISMA has established rules and regulations governing the trading
and settlement of eurobonds. It is classified as a designated exchange by
FSA. Designation allows firms to treat transactions effected on the exchange
in the same way as they would treat transactions effected on a Recognised
Investment Exchange.

EU regulation The EU also has a major influence on the regulation of
trading in securities markets mainly through the Investment Services
Directive (ISD), the most important component of which is the single
passport which it provides for investment firms. The passport enables a firm
incorporated in a Member State to engage in investment services throughout
the EEA without separate authorisation by the Member State in which the
firm does business.

As a part of a wider move towards the integration of European financial
services through the implementation of the Financial Services Action Plan
(FSAP), the ISD is to be replaced by the Markets in Financial Instruments
Directive (MiFiD). This directive which will govern most investment
services and the activities of exchanges across the EU. The new directive will
will extend regulation to include investment advice and activities in relation
to commodity derivatives.It is planned for implementation in April 2007.

CONTRIBUTION TO THE UK ECONOMY

The UK securities markets include both trading in domestic securities and the
trading of international securities, 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.

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.

In 2004 operating profits of securities dealers totalled £2.3bn, up from a loss
of £160m in the previous year (Chart 23). This was due both to an increase
in profits from securities dealers’ market making and other dealings as
principal and more emphasis on cost control. Between 1996 and 2002,
securities dealers results fluctuated between a loss of £1.5bn and a profit of
£4.6bn. The losses incurred in 1997 and 1998 were due to poor market
performance arising from financial difficulties of some emerging economies,
particularly in Asia.

Employment According to the FSA, the number of individuals in the UK
authorised to conduct customer trading of securities reached 8,045 in April
2005. This figure does not include support and back office staff.

Value added No official estimate is made for securities dealers’ contribution

Source: Office for National Statistics

Chart 23 Operating results of securities
dealers

£bn

-5

2004

2003

2002

2001

2000

1999

1998

1997

1996

Revenue

Operat. result

Expenditure

Source: Office for National Statistics

Chart 24 Net exports of securities dealers

£bn

500

1,000

1,500

2,000

2,500

3,000

3,500

2003

2001

1999

1997

1995

1993

Table 15 Net exports of securities dealers

Source: Office for National Statistics

£m

1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

Commision

and fees

1,434
1,955
1,649
2,103
2,761
2,831
3,996
5,632
5,211
4,290
3,922

Spread

earnings

522
803
690
934

1,253
1,233
1,209
1,438
1,492
1,195
1,331

Total

Exports

1,956
2,758
2,339
3,037
4,014
4,064
5,205
7,070
6,703
5,485
5,253

Imports

854

1,291

879

1,276
1,293
1,675
2,340
3,493
3,323
2,367
1,944

Net

Exports

1,102
1,467
1,460
1,761
2,721
2,389
2,865
3,577
3,380
3,118
3,309

Exports

IFSL

International Financial Services, London (IFSL) is a
private sector organisation, with over 30 years
experience of successfully promoting the UK-based
financial services industry throughout the world.

Research

IFSL’s research informs by raising awareness of the UK's
role in international financial markets and by highlight-
ing the major contribution of financial services to the UK
economy. Financial sector reports in the City Business
Series remain the centrepiece of research. IFSL is also
producing a separate series of reports that highlight UK
product expertise in for example Public Private
Partnerships, Pension Reform and Privatisation. Other
major publications include International Financial
Markets in the UK, UK Financial Sector Net Exports and
World Invisible Trade.

This Brief was compiled by IFSL Economist Marko
Maslakovic.

All IFSL’s publications can be downloaded at
www.ifsl.org.uk

Further information on statistics and publications can be
obtained from the website or:

Duncan McKenzie, Director of Economics
+44 (0)20 7213 9124
d.mckenzie@ifsl.org.uk

Marko Maslakovic, Economist
+44 (0)20 7213 9123
m.maslakovic@ifsl.org.uk

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This brief is based upon material in our possession or
supplied to IFSL, which we believe to be reliable. Whilst
every effort has been made to ensure its
accuracy, we cannot offer any guarantee that factual
errors may not have occurred. Neither International
Financial Services, London, nor any officer or employee
thereof accepts any liability or responsibility for any
direct or indirect damage, consequential or other loss
suffered by reason of inaccuracy or incorrectness. This
publication is provided to you for information purposes
and is not intended as an offer or solicitation for the pur-
chase or sale of any financial instrument, or as the
provision of financial advice. Copyright protection exists
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reserved.

to GDP, but it is possible to make an estimate from market data. Total
expenditure of securities dealers in 2004 has been estimated by the ONS at
£17.6bn. Employment costs of London Stock Exchange firms averaged
around 40% of operating costs in recent years; applying this proportion to the
£17.6bn implies total employment costs of £7.0bn.

The figures for securities dealers’ profits in Chart 23 include trading on
securities dealers’ own account which does not form a part of GDP.
Excluding this, securities dealers had an operating loss of £6.2bn in 2004
which taken together with employment costs implies a value added
contribution of £0.8bn in 2004. This is equivalent to around 0.1% of GDP in
“value added” terms.

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 2003 net
exports increased 6% to $3,309m (Chart 24). This was three times the level
a decade earlier due to both to an increase in commission and fees and spread
earnings (Table 15).

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LINKS TO OTHER SOURCES OF INFORMATION:

Bank for International Settlements
www.bis.org

Bank of England
www.bankofengland.co.uk

Financial Services Authority
www.fsa.gov.uk

HM Treasury
www.hm-treasury.gov.uk

London Stock Exchange
www.londonstockexchange.com

National Statistics
www.statistics.gov.uk

World Federation of Exchanges
www.world-exchanges.org

July 2005

Securities Dealing

Data files

Datafiles in excel and html format for all charts and tables
published in this report can be downloaded from the
Research section of IFSL’s website www.ifsl.org.uk