No future for dealers

The only surprise is that electronic trading has not happened sooner
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The Independent Online
Almost my first job in the City was as an unauthorised clerk, or Blue Button, on the floor of the London Stock Exchange. For those who experienced the British public schools system during the immediate post- war period, it was a bit like being a fag. In this case you were fagging for the authorised clerks, or dealers.

They were the people charged with buying and selling shares on behalf of the firm's clients. The most senior of these were members of the Stock Exchange.

In 1966, when I was transferred from the market back to the office, I did not want to go. At the age of 21 I could have become authorised myself, but a kindly old member told me I should take the opportunity to move away from the floor of the Stock Exchange. The future did not rest with dealers in his opinion. How right he was.

Over the past three decades I have seen the number of people employed in dealing departments slashed. In terms of numbers the reduction has probably not been that great. But because business has expanded massively, as a percentage of employees in a stockbroking firm the number has dropped dramatically. Next month more changes seem set to continue the erosion of the position of stockbroking dealers.

The Stock Exchange Electronic Trading Service (Sets) comes into operation on 20 October. It will bring the London market up to the same speed as many overseas exchanges. It will allow buyers and sellers of shares to be matched by way of the computer, rather than having orders executed through a market-maker who would make a profit on the transaction. Not only should it lead to more efficient markets, but the cost of dealing should be cut as well.

Electronic matching of bargains is not new. In the 1970s a group of institutions set up a trading system called Ariel. It was not a success. Many of the institutions who subscribed watched the screen to find out what other people were doing and then used the anonymity of the stock market to transact their own business. Things are different today.

Computers have become much more important both in trading shares and in monitoring activity. Knowledge once confined to dealers on the floor of the Stock Exchange is now displayed on screens around the City. With the ending of face-to-face trading on the floor and the publication of market-makers' prices on screens in every investment professional's office, there no longer seems the need to avoid taking that extra step which will remove the need for human involvement in a transaction. The only surprise is that it has not happened sooner.

For the electronic order book, as it is known, to work properly, all those involved in securities trading need to have confidence in the system. Many City workers had last weekend disrupted by the need to submit to tests of Sets. The result was mixed. In order to ensure the system would cope with volatile markets, a day's trading was simulated whereby the FTSE 100 indexrose and fell 200 points rapidly. On balance most practitioners consider the system can take the strain, but there was by no means universal acclaim.

One effect though, has been quite dramatic. The Stock Exchange announced it is to lop 60 per cent off the charges it makes for allowing business to be transacted through London. This is a reflection of the fact that TradePoint, the alternative market formed by former Stock Exchange employees, is now sufficiently well established to represent a real threat and is providing a much cheaper alternative.

The announcement that a number of major inter-dealer brokers, which admittedly are supporting TradePoint financially, will switch electronic trading to the new exchange must have caused some disquiet in Throgmorton Street. It takes competition to bring prices down.

This introduction of the electronic order book is expected to lead to much higher volumes for the London stock market, so in the end the Stock Exchange may not necessarily lose revenue by cutting charges. Its introduction also follows a period when an increasing amount of business is now handled by computers anyway. Many of the larger firms have direct links to market- makers.

Dealers will still be needed to execute difficult or unusual orders. It is just that not so many will be required as before. I'm so glad I took that veteran stockbroker's advice all those years ago.

Brian Tora is chairman of the Greig Middleton investment strategy committee and can be contacted on 0171-655 4000.

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