Derek Pain: Exchange merger will hit the small investor

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The Independent Online

Life is going to get more difficult for the small investor, already the poor relation of the stock market.

Life is going to get more difficult for the small investor, already the poor relation of the stock market.

The controversial London-Frankfurt Stock Exchange merger, assuming it goes through, could be the next development to create problems. I expect the small player to be shunted to the bottom of the priorities list if this miscalculation is allowed to become another example of merger madness.

Fears about the merger have prompted Brian Winterflood, who specialises in making markets in the shares of smaller companies, to explore the possibility of establishing AIM, the small company nursery, as a stand-alone market.

By fretting about AIM, where small investors have their greatest influence, Mr Winterflood is highlighting the damage the merger could inflict at the bottom of the market.

Any Anglo-German alliance will compound the agony which Crest, the computerised share settlement system, is already inflicting on traditional investors who are essential to the stock market, representing much of the trading carried out by smaller stockbrokers.

The trouble is the small investor, and, indeed, private-client stockbroker, carry little clout when their very different needs are compared to those of major fund managers and the big investment houses master-minding million-pound deals.

The private investor, who likes the obvious safety paper certificates provide, is likely to be the major casualty of the next round of Crest changes.

Crest has no time for certificates as, for reasons which are not entirely clear, it relentlessly reduces the settlement period for completing share transactions. The present settlement time - the days allowed for cash and shares to change hands - is T+5 (trade, plus five days) although most private-client stockbrokers permit T+10. But in February T+5 is expected to come down to T+3, putting more pressure on brokers still prepared to continue absorbing the extra cost of T+10.

Clearly, T+3 is an impossibly short time to complete a certificated share deal. And, allowing for our postal system, T+5 is exceedingly tight.

So the squeeze is on. One execution-only broker refuses to undertake certificated deals; another private-client broker charges £10 for the privilege.

Lumping extra charges on the investor who wants the security of paper certificates seems to be the most likely outcome. But there is an added danger. Besides, say, a charge levied by the broker, there is a possibility a two-tier market in share prices could develop. T+3 trades could be completed at lower prices than T+10, if market makers decide they want compensation for waiting longer for their cash.

So should investors move to Crest, with their investments acknowledged on occasional, bank-like statements? I would advise caution. There is always the chance some brokers will retain T+10 at no extra cost, even if they do sometimes have to endure a paper chase. And certificated trading does provide the advantage of satisfying even the trunk-in-the-attic mentality.

Crest offers two options, a nominee account through a broker or personal membership.

Both incur varying dealing costs. One major disadvantage of accepting a brokers' nominee account is that the shareholder becomes divorced from his investment. He loses the right to attend yearly shareholders' meetings and collect any perks available. Nominee shareholders are unlikely to receive yearly reports, and takeover and rights issue documents are a grey area.

To add to the remoteness, it is not uncommon for brokers to hold back dividend payments until they reach a certain level before sending a cheque to the investor. Some brokers do not charge for joining their nominee account, others up to £150 a year.

Personal membership is through a sponsoring broker who can charge the investor what he likes; the Crest fee to the broker is £10 a year. By having his own account, the investor remains the legal owner of the shares and therefore gets all the bumf and any rewards which go with it.

I would not be surprised, even if the Anglo-German merger fails, to see some form of break-away, small-players share market develop. After all, Ofex, the fringe share market created by John Jenkins, has proved there is life outside the shadow of the Stock Exchange.

Now, I shall be away for a summer break, and will return to the plight of the small investor in three weeks.

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