Back to school: Broadening financial understanding

Published in the London Stock Exchange Group Yearbook 2012.

Back to school: Broadening financial understanding

At the moment, around 4% of the trading volume on cash instruments are made by retail investors, but the London Stock Exchange Group (LSEG) is determined to boost this number. To this end, education is a vital component in attracting more private investors to the market. Before people can become participants they need a basic understanding of the financial products available, as well as a grasp on the ins and out of the practicalities of trading them.

But before we look into the LSEG’s efforts to aid in people’s financial understanding, there is one question that begs an answer: Why? If the private investor base is so small, you might ask, why not focus on catering to the institutional customer base? The answer to this question has to do with diversification of the order book, explains Gabriele Villa, head of private investors at LSEG. Especially for the smallcap stocks, it can also be important to aid with liquidity,

“Having a large base of private investors is very positive for the industry, and for the exchange. We believe a key element for the exchange is to have a liquid and transparent book for all assets. One way to do this is to have different types of investors trading at all times,” says Villa, explaining how having different types of traders means there will be a range of different strategies at play at any time. For example, a fund manager will approach a trade with different priorities than someone eager to strike it rich by picking the next ten-bagger. Furthermore, someone looking to boost his or her pension income, a group of investors which keeps growing now that this is increasingly the responsibility of the individual, will have a very different approach to risk than a parent investing on behalf of a child.

The LSEG considers it a priority to help educate potential investors, and the exchange will at all times have a range of resources available to this end. This includes hosting roadshows, making available dedicated web tools including educational webinars, as well as arranging investor expos. “Some of the elements of attracting private investors to the markets are out of our control, such as government taxes. But knowledge about the products is something we can help, as well as issues such as brokers’ connection to the exchange. We have a project in place for the latter,” says Villa.

The LSEG is shortly launching a newsletter for private investors, inspired by the success of a similar product in Italy. LSEG-owned Borsa Italiana has been running a derivatives-focused newsletter since 2003, and by 2010 the exchange had launched letters to cover all aspects of the markets. “The newsletters are a significant marketing channel for Borsa Italiana. External parties such as bond- and ETF issuers are invited to write for the newsletters, ensuring it becomes an interesting read,” says Villa. The LSEG first attempted a newsletter launch last year, but the project has now been overhauled to solve problems with user-friendliness; “We hope it will provide investors with a sort of official guideline.”

Borsa Italiana’s impressive retail investor base has become a source of inspiration for the LSEG. “Certainly direct participation with the market is at a higher level in Italy than in the UK, and we have in London sought stimulus from our Milanese colleagues in terms of growing UK private investor participation,” says Mauro Romano, business development manager at LSEG Equities & Derivatives. He points to Borsa Italiana’s highly successful Online Trading Expo event: “[This has] inspired us to further improve the level of the education we want to offer for engaging with private investors in an interactive and constructive manner, and to build the foundations of a larger and more active UK private investor community.”

Romano is heading up LSEG’s London Investor Show, which will take place for the second time at London’ Olympia on 26th October. The event brings together trading experts, analysts, brokers and commentators to provide attendees with a thorough range of views. The show will feature five professional investment workshops, themed on investment fundamentals, technical analysis, fixed income, trading psychology, and how to spot and take advantage of market trends. The speakers will also congregate in a panel to discuss recent market movements and how retail investors can best respond. “The London Investor Show is the UK’s premier show for private investors and active traders. This exciting annual event offers a unique opportunity to learn about investing and the financial markets,” asserted Xavier Rolet, chief executive officer of the LSEG. “Giving private investors access to a wide range of investment products and services across equity, bond and gilt markets is a key focus of the LSEG.”

The steady stream of new products available for investors to choose from is a key source for questions from private investors, says Romano. While the launch of new products makes the financial landscape more diverse and interesting for traders, it also makes it more complex and challenging to manoeuvre.

“A key concern for [private investors] is product and market information. Do they have the right information about the products they are investing in? Do they have the right tools for analysing potential investments? Do they have a feel for the market’s dynamic and how to best manage their exposure to risk? The LSEG takes these questions seriously and we have worked hard to […] understand [private investors’] needs, and to improve their access to the highest quality of tools and educational materials.”

The management of risk is a key factor in the LSEG’s education efforts, as people who trade without fully understanding the products are more likely to have a negative experience. “If people lose too much money we stand the risk of losing their custom forever. This is why we want to provide them with as much information as possible,” says Villa. Having an attractive and informative web portal is vital in order to make it easy for investors to make good choices, and the LSEG has been steadily improving the content on its site over the past two year,, by making sure it has real-time prices and up-to-date news content.

“The UK is one of the most important financial centres in the world,” says Villa. “The level of service provided by online brokers is very good, but it focuses more on unlisted products, such as forex and contracts-for-difference, which is unfortunate for us.” While it would be easy enough for the LSEG to increase the number of trades made by retail investors by adding ever-simpler products to its offerings, Villa says the exchange prefers to take a longer-term approach. In essence, the LSEG wants to be considered the first port of call for retail investors when they want to make a trade. In order to get to this point, making sure investors see the LSEG as an impartial and helpful source of information is half the job.

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