Casey Sets the stage for the Exchange revolution

Gavin Casey is taking it easy this weekend. Fourteen months after joining the London Stock Exchange as chief executive, Mr Casey and a team of more than 250 Exchange staff and consultants will tomorrow unveil the biggest changes to the UK stock market since Big Bang.

The start of an electronic order-matching trading system - a controversial plan that cost Mr Casey's predecessor his job and promises to change the world for thousands of City workers - will complete a circle begun 11 years ago when the exchange closed its historic trading floor and computers were first used to trade.

The new system - called Sets, for Stock Exchange Electronic Trading System - will dramatically change the way shares are traded. It will allow investors to bypass the market makers who traditionally offered stock quotes by phone and to place orders through brokers directly to the exchange, where they will be electronically matched.

The exchange says the new system, which will initially only operate for companies in the FT-SE 100, will make trading costs cheaper for investors by narrowing spreads. It will also make trading more transparent by wiping out many of the rules that let market makers keep their identities secret for up to five days following some trades.

Mr Casey, a former Smith New Court executive who helped with the integration of the company after Merrill Lynch bought it in 1995, was able to mediate successfully between the market makers - including Merrill - and users of the Exchange in the dispute over Sets.

Many international investors preferred the order-driven system and Mr Casey persuaded the market makers to try it, pushing the project through in a little over a year.

Mr Casey takes no credit himself, saying it was a team effort. He said the exchange and its members knew it was time to modernise, although he denies the exchange would have been left behind if it kept its old market making system exclusively.

"We did have a very big lead at the time of Big Bang in London, which to some extent the local exchanges have caught up on," he said. "Competition is increasing, but it's impossible to say that if we'd stayed with the old system we'd wither and die."

The exchange expects the system to boost trading volume. Exchanges in Zurich and Paris reported 15 per cent to 20 per cent gains in volume after introducing electronic systems.

Sets will reduce the need for market makers, but it won't make them obsolete. Far from it; any trades larger

than eight times normal market size, which is 2.5 per cent of average daily volume, will be handled by the market makers. They will also handle all trades on FT-SE 250 shares and other smaller stocks.

The main bone of contention is still disclosure. Market makers doing large trades will be required to disclose their identities after completing 80 per cent of the trade. This will hamper market makers who want to sell the final two million shares of a 10 million share block at the end of the day.

"It will take longer to deal in greater blocks of shares as now market makers will be reluctant to take on a lot of risk because of the new visibility," said Simon Smith, an investment manager at Albert E Sharp. "They should be able to hide some of the risk."

Indeed, disclosure will be a problem on Sets as well. The new system will guarantee anonymity for investors until the moment the trade is executed, at which time the identity of both parties will be disclosed.

This rule is being seized on by the Tradepoint Investment Exchange, the electronic, order-matching rival to the London Exchange which guarantees total anonymity to users. Nic Stuchfield, its newly-appointed chief executive, said the exchange expects to gain business from securities firms as they learn to use order-driven systems and discover the benefits of Tradepoint. "We are going into an unknown world on Monday," he said. "But it should be a more favourable world for Tradepoint than the previous one."

Another problem with disclosure is that investors won't be sure who they are dealing with until the trade is executed. Whereas investors are happy to deal with well-capitalised firms like Merrill Lynch or BZW, they might not be pleased to find that the counterparty is a small brokerage whose cash balance may be suspect. To solve this, the exchange has set up a pounds 65m insurance policy to cover potential losses from counterparty defaults.

Mr Casey said he expected trading on the order book to begin cautiously as securities firms test the system. The exchange has warned traders not to try to manipulate the system to trick investors by trading at the wrong price. During rehearsals, traders found that by entering outrageously high or low prices into the system, the orders would sit undetected until someone entered a mistaken order that matched them. The exchange said these so-called "snake in the grass" trades would be treated as a regulator abuse.

Mr Casey said the exchange has taken every precaution to guard against technical or regulatory mistakes but that it will be open to changing parts of the system if they do not work well. "There are bound to be some teething problems," he said. "If something doesn't work or if the rules don't work, we'll change them."

Mr Casey remembers looking out over the City on the day of the 1987 crash - following the great storm - and seeing a "ghost town". But he harbours no superstitions about what might happen in the markets tomorrow.

Whatever happens, the City will be ready, he said. "I think they're as ready as they'll ever be. That doesn't mean they won't have to adapt further."

Start your day with The Independent, sign up for daily news emails
Sport
sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing