What is the London Stock Exchange?

What exactly is the London Stock Exchange for? And what does the future hold as bidders line up to acquire the company?

The London Stock Exchange is a market place where brokers and market makers who are member firms trade shares of public limited companies 2,860 companies worth £3,537bn, to be precise.

The two primary markets are the Main Market for established companies and the Alternative Investment Market (Aim) for small-cap, high-growth firms. Companies list their shares so that they can raise capital to finance their business.

Share prices move depending on the level of buying and selling activity by the underlying market makers. It's a supply and demand game driven by the company's performance, activities, and market news in general.

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What are its origins?

It all started in the City's coffee houses in the 17th century. On behalf of clients, traders bought and sold shares in joint stock companies through jobbers. A core group of 150 traders used to meet at Jonathan's Coffee House. Over the centuries, traders became brokers, the coffee house became the Stock Exchange and finally, jobbers became market-makers.

The late 18th century was the turning point. A dedicated building was put up in 1773 and a regulated exchange with a formal membership established in 1801. The system was continually refined up to the 1812 Deed of Settlement, which formed the basis of operations for the Stock Exchange until it deregulated.

Have things changed?

In 1986, deregulation saw the abolition of minimum commissions and a true competitive market was born. That also meant that brokers could be traders, traders could be brokers and foreign competitors could buy brokers and/or traders. As part of this move to a more competitive market, the London Stock Exchange became a public limited company itself, required to disclose activities and report to shareholders, exactly like the other plcs listed and traded on it.

How does it work?

Market makers use several different trading systems. SETS is an automated order-matching system for highly traded stocks. SEAQ is quote driven for smaller, less liquid companies: interested buyers must call brokers to check prices. There are a couple of hybrids in between, plus an international order book for the most liquid overseas shares.

And there are a lot of those. Although the LSE is a core London institution and inhabitant of the Square Mile', it is highly international. Three hundred and fifty foreign companies from 54 different countries have listings on the Exchange and last year six of the LSE's ten largest floats were overseas companies.

Why do foreign firms list here?

There is a reason that more and more companies are listing on exchanges away from home. Trading can now take place quite easily across continents because so much is conducted via computer and telephone. And as the LSE provides companies with access to one of the largest pools of capital in the world, it is very popular.

Currently, 43% of all firms that have completed primary or secondary listings outside their country of nationality have chosen the LSE, says David Smith in The Sunday Times. London's time zone is particularly convenient, as it is sandwiched between Asia and the US. "You can deal with both America and the Far East in the same day," says Michael Petrie, chairman of Bear Stearns International.

What does the future hold?

All this cross-border activity, and the LSE's large trading volume and reach but small size as a company, has whipped up something of a bidding frenzy. The latest bid has come from US technology exchange Nasdaq. The New York Stock Exchange (NYSE) is also rumoured to be putting together a bid, following its own recent listing. Would a takeover of the LSE by either Nasdaq or the NYSE create a stock exchange superpower that would dominate the global market place? Possibly, but there is much debate about the benefits of consolidating stockmarkets.

Consolidation might bring about efficiencies and cost savings, and may even create a single electronic trading platform that operates from London's opening at 8.00am (3.00am New York time) to New York's closing at 4.00pm (9.00pm London time). But it could also provoke interference from US regulator, the Securities Exchange Commission (SEC). If either of the US exchanges can get to where they need to be on price, there may still be many operational issues to iron out in order to take the first leap towards a functional global exchange.

By Louisa Mitchell