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Britain’s financial regulator is aiming to tackle a “drastic under-reporting” of market liquidity that has driven some companies to move their listings to the US by starting to publish all trading data for London-listed shares.
The Financial Conduct Authority’s unusual plan to collect and publish all share-trading data from different venues — including exchanges and dark pools — highlights its frustration at what it believes is a misleading and overly negative picture of UK market liquidity.
“The truth is we have way more liquidity here than is often reported and that is just silly,” Simon Walls, interim director of markets at the FCA, told the FT in an interview.
“We are talking to loads of parties at the moment about whether the FCA can, at a little bit of risk to ourselves, step in and just sort this out,” he said.
Such a move would act as a stopgap before the regulator’s plans for a single stream of trading data are due to come into effect next year.
The regulator believes most UK market share liquidity data is under-reported because it is only based on the London Stock Exchange’s central limit order book, and excludes many trades, including periodic orders — trading at scheduled auctions — at the LSE and trading on more opaque venues such as dark pools.
People close to the LSE have acknowledged that prospective listing candidates still repeat the view that there is lower liquidity in the UK than in the US or other countries as a potential obstacle to listing in London.
In the past year the exchange has sought to counter the widely held view that US exchanges offer greater liquidity by circulating a “myth busting” document showing real liquidity across the FTSE indices is comparable to both the S&P 500 and Nasdaq 100.
The document, seen by the FT, says that out of the 20 UK companies that have raised more than $100mn and listed in the US, only three are trading higher than their float price, while 11 have delisted and the remaining six are trading an average 74 per cent lower.
“People in the market know this is a problem,” Walls said, referring to the under-reporting of liquidity. “But it does dog us because sometimes when an issuer has historically chosen to move from the UK to the US, one of the thoughts is that liquidity is lower in the UK and often it’s not true.”
Between January and September last year, the FCA estimates there were 270mn transactions in UK shares recorded in central limit order book data. But it said the total notional amount of share trading over that period “appears to be around four times as large”.
The FCA is consulting on proposals to create a so-called consolidated tape that would show a full picture of trading activity by creating a single stream of all UK share trading data. But this is only expected to be ready next year.
In the meantime, Walls said the FCA was in talks with various market participants to collect and publish data on all UK share trades, including those done outside of public exchanges, such as over-the-counter, on dark pools and via so-called systematic internalisers — investment firms that can execute trades off exchange.
“We’re intending to have an interim [solution] just to plug this gap, so that when people report — or are making these quick assessments — of what liquidity is like in London, we can just get it out there that it is way higher than is often reported,” he said.
Publishing share trading data would be the latest step by the FCA to encourage a revival of activity in UK capital markets.
The UK has endured a long-running drought of initial public offerings, and several large companies have moved their listings overseas, but a handful of London flotations in the final few months of last year helped lift some of the gloom.
“We frequently see UK liquidity being under-reported. This has a direct impact on the perception, and therefore competitiveness, of UK capital markets. We welcome efforts to rectify this,” said Charlie Walker, deputy chief executive at the LSE.
Last month, changes came into force from the FCA to make it quicker and easier for companies to issue equity and debt in the UK, such as by removing the need to issue a prospectus for many secondary share sales.
The regulator is likely to ease restrictions on payment for order flow, a controversial practice in which brokers earn commission for routing customer trades to certain market makers.
“We are much more restrictive than other markets [on payment for order flow],” said Walls. “There are opportunities in truly wholesale business where we can make a change.”
He said the regulator also planned to reduce reporting requirements for many over-the-counter securities trades, remove position limits on commodity trading, introduce a framework for more tokenised assets and cut disclosure rules for securitisations.