Global investors have bulldozed bourse deal, say critics

London-Frankfurt stock exchange merger raises doubts over costs, currencies and systems and the position of retail investors
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The Independent Online

The bigwigs from London, New York and Frankfurt may have had cause to celebrate after toasting their megabourse deal on Wednesday. But among brokers, particularly those at the retail end who will see their world turned upside down as a consequence of the merger of the UK and German exchanges, doubts quickly set in.

Hardly had the ink dried on the agreement to create iX before voices were being raised about the number of the issues being glossed over in the rush to get the deal done.

For one thing the London Stock Exchange has clearly underestimated the currency issue. Despite attempts by Don Cruickshank, chairman-designate of the new megabourse, to refute suggestions that there was a plot to impose the euro on the UK by the back door, it is already proving a major worry among retail brokers and UK pension funds, which have by law to match their sterling liabilities with sterling assets.

Mr Cruickshank insisted that customers would choose which shares, if any, would be quoted or traded exclusively in euros. But his remarks begged the question of which customers he had in mind - the big wholesale investment banks, now all foreign-owned, or the more domestically oriented pension funds and retail brokers.

David Gould, director of investment at the National Association of Pension Funds and himself a pension fund trustee, said: "There is a concern there could be an exchange-rate risk that would exist if a substantial proportion of UK companies were to be denominated in euros without the UK being part of the euro zone."

Another retail broker was more forthright. "Our clients are going to want to trade in pounds, and understand the value of portfolios in pounds, not euros. What I am concerned about is that the decision whether or not to switch is going to be taken by a chief executive who is not British whose country is already in the euro zone."

Many were asking whether the deal would deliver lower costs. The fear is that the benefits of liquidity and scale would be outweighed at least in the short to medium term by the cost of switching from Sets, the LSE's electronic system, to Xetra, the Frankfurt platform. There was disappointment, too, that clearing and settlement, a major factor in transaction costs to investors, were for political reasons excluded from the deal.

The LSE has dismissed as scaremongering suggestions that the cost of switching systems will be anywhere near the £1bn estimated cost of the change to Sets. But the unwillingness to provide even ballpark numbers has added to the confusion. One broker yesterday: "For the big global banks who are behind this, another £100m on their IT bill is nothing, but for a small broker this a big cost."

Most of all there is concern that this is being bulldozed through by big global investors with little regard for the impact on the ordinary customer. The LSE has not fought its corner very well, it is felt.

Charlotte Black, marketing director of Brewin Dolphin, said: "I am all in favour of the idea of global markets because it reduces costs and brings more choices. But from what we have seen of the terms it does not seem very fair. I support the principle; I just feel that the LSE has negotiated in a sort of panic."

The fact that the deal has come about at all testifies to the shift in the balance of power in the London and Frankfurt exchanges in recent years away from the domestically focused brokers towards global firms, for which the range of national exchanges with different currencies, traditions and rules is an irritant they can do without.

But retail investors have choices. Lynton Jones, chairman of Jiway, which is launching its own pan-European trading platform for retail investors later this year, believes the old exchanges would like to fill that gap. "The old exchanges are coming to the same conclusion many of us reached a long time ago; that the days of exchanges operating as large national monopoly utilities is over. However, I am not sure this specific solution is the answer for retail investors."

Martin Wheatley, the LSE's director of strategy, said some of the concerns that have been raised smacked of sheer jingoism. "The language of the exchange will be English, and the companies listed will have to conform to international standards of accounting and reporting." The point about whether the UK Takeover Code would apply is an example. "We have created an environment where these issues must be solved."

A poll of 20 independent UK brokers by The Independent yesterday showed that 11 were in favour of the deal in principle. Eight were "don't knows", and only one was definitely against.

David Howard, chairman of Charles Stanley, a mainly retail broker, said those bleating about the Germans taking over would have to accept that the issue was lost long ago along with control of the big broking houses.

Angela Knight, the chief executive of APCIM, the retail stockbrokers lobby, said she thought the deal was the right one, but there was work to be done. "I think we will be spending a lot of time discussing with the exchange to ensure that the details our members are looking for are in place."