It may seem somewhat counterintuitive in a world that seems dominated by a race to zero when it comes to charges whilst we also see an increasingly prolific array of brokers offering dealing services, but would investors benefit from a significantly better trading experience – and indeed would it help boost London’s ambitions in terms of getting more companies to list in the City – if it cost more to trade?
An event hosted last week by Edison Research and CrowdX saw the highly regarded fund manager Gervais Williams – a strong advocate of small cap UK equities – suggesting that liquidity provision was being adversely impacted by the fact brokers and market makers simply couldn’t deliver a sensible return for themselves. If instead we imagine a situation where issuers can dictate what the minimum commission charges are, more market making activity would be encouraged and consequently, liquidity would have the potential to improve.
This may seem like a bold call, especially coming from someone trading significant blocks of stock, but it’s not without precedent. All too often in the world of leveraged trading, the idea of ultra-tight or even choice spreads (where the bid and offer are both priced the same) lead to disappointed traders, either because they were unable to get orders filled or ended up feeling the broker was working against them. Ultimately wider spreads meant it was easier to get filled at the quoted price and the trading experience improved as a result.
- The UK’s autumn budget: how does it affect traders?
- Saxo Bank debuts SaxoInvestor as one-stop-shop for UK investors
- NAGA launches first trading app to be integrated into Telegram
So, is this idea that issuers can dictate the terms on which investors buy and sell their stocks undemocratic? Or is it the potential silver bullet which would improve market quality, the trading experience and the overall appeal of London as a listing venue? Mr Williams noted that he had already discussed the adoption of such protocols with both the London Stock Exchange and the Treasury, and indeed CrowdX’s proposals – where it is building a platform that operates like a public market but for private companies – also come with similar attributes.
Whilst regulators and politicians are all focused on the idea that improving the attractiveness of the UK as a capital raising venue – and indeed the trading experience itself – can be conquered by changing the regulations surrounding a listing, the true solution of incentivising the generation of liquidity may be a far more obvious one. And even if on face value it feels like it costs a bit more to get into those positions, more liquid stocks will be more accurately priced, making the exit that much more efficient.