It was good to see an informed note from Lex on the discount in the London stock markets (“The London discount is about performance, not geography”, July 25).

However, the logic explained ignores crucial aspects of share buybacks that are mentioned at the end of the article. Currently, when UK-listed companies return capital to their shareholders, approximately 50 percent is through dividends and 50 percent through share buybacks. Share buybacks return capital to the selling shareholders, while the remaining shareholders benefit from an increase in ownership, proportional to the number of shares bought back and cancelled. Unfortunately, UK market rules seem designed to protect intermediaries rather than the remaining shareholders. Companies are the largest net buyers of UK shares. The last thing a large buyer of shares should do is announce its intentions to the market before it starts buying. Furthermore, updating the market daily on share buybacks and handing the full order to an investment bank’s derivatives desk further erodes value.

As a result, much of this capital is lost in friction rather than returning to loyal shareholders. One man’s friction is another man’s lunch. A closer look at recent investment bank profits shows that their equity derived desks are generating significant returns.

As Brooke Masters pointed out last year, poor Royal Mail paid one such bank an 8.5 percent fee to buy back its own shares.

Michael Seigne
Founder, Candor Partners, Binsted Mede, Hampshire, UK