U.K. New Stock Market Rules

The writing is on the wall for the London Stock Exchange. After bulking itself up when the U.K. was in Europe aiming to become part of the biggest exchange in the EU, after Brexit the exchange has shrunk, selling off the Italian Stock Exchange and buying for a huge sum a chunk of the old Reuters.

These developments, however, are not the core of the problem, no matter that the alarm bells are ringing, because big companies no longer wish to list in London and at the tail end of the exchange’s offering, Alternative Investment Market (AIM) companies are dropping off like flies.

While the slow death of the micro-cap section is not necessarily material, the lack of big new listings in London is potentially fatal. Companies want to list in the U.S. instead, especially tech companies, and the reason is simple: the U.S. values listed companies much more than the U.K.

You can see this clearly here:

The difference is more clearly seen in the tech-heavy Nasdaq versus the FTSE 100:

It is no mystery why a tech company would want to list in the U.S. rather than in the U.K. A company is simply worth more listed in the U.S. and its owners are richer as a consequence.

There are other issues like a distrust of tech companies in the square mile and the general derision of loss-making growth companies, but the proposed solution to this decline is going to be tackled by a change in regulation, with some snipping and adjusting of the rules to hopefully make the problem go away.

It won’t.

The problem is of course systemic but it’s not the words doing the damage, it’s the numbers. Take a company like Lloyds Bank, it will turnover in trading of its shares its whole market cap in around a year. Because of this it will hand out 0.5% of its total share value in tax to the government via stamp duty. Over 20 years, without compounding, that’s 10% of its value. However, the effects are worse because one of the modern reasons for a transaction tax is to slow a market down, so that those dreaded speculators are driven off. Obviously, it also slows down everyone else as well. This badly hurts liquidity, and liquidity is a key function of a share’s value and liquidity get sparse outside of all but the biggest U.K. companies.

So stamp duty hurts value both ways. Why would a company want to list in London when its value is going to be sliced away by a wealth tax like that and it does not enjoy the volume of trading it would elsewhere?

Of course government won’t want to scrap a tax even if the golden goose is wasting away. This is short sighted because the U.K. stamp duty transaction tax makes a basic mistake. It takes the root of wealth rather than the fruit of wealth. However, the £4.3 billion it raises is a significant sum even though it should seem obvious that it is cannibalistic.

The capital gains tax generated from the lost gains of the FTSE when compared to the U.S. markets is much greater than the transaction tax take. That is before you take into account the benefit to the U.K. economy of a vibrant stock market packed with companies raising capital to build industries funding a vibrant financial system and throwing off the vast taxes corporations generate.

Now you might say, I am comparing the U.K. with the U.S. and the U.S. is special. Well, how about Germany:

France has a smaller transaction tax and likewise wallows like the FTSE 100.

Reorganizing the deckchairs in the city of London will not save the London Stock Market from stagnation. Perhaps letting pension funds once again have a fat allocation of shares in their portfolios would make a big difference but seeing how government forced pension funds into bonds a generation ago so as to milk the population of their savings, it is unlikely pension funds will be unfettered just as government needs every penny of buyers for their paper.

A simple solution would be to scrap stamp duty but for the tremulous a gentle adjustment down of 0.1% a year would leave room to measure the benefit to convince the non-believers.

Either is unlikely to happen, which will mean the strip mining of the U.K. stock market by foreign companies will continue and the decline will not reverse.

Stamp duty will continue to gnaw at listed companies’ value and indirectly at the U.K. economy while the sort of enterprises that bring or would bring so much tax revenue to its shores are whisked away or attracted elsewhere.