City: Brave attempt

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The Independent Online
THE obvious piece to write on the failed attempt last week by Warburgs to impose transparency on dealings in BT shares in the run-up to the Government's pounds 5bn sell-off is what virtually everyone in the City was saying about it - that forcing Warburgs to back off is a victory for common sense and sound market practice. I don't think I've ever come across a case of an attempted rule change causing such tut-tutting and irritation among competitors and institutional investors. Typical of the arrogance of Warburgs, which increasingly seems to dominate what little corporate finance business there is to be had in the City, to believe it can waltz about changing the rules to suit its own interests, competitors said.

What Warburgs wanted to do was enforce immediate cash settlement on all transactions in BT shares. This would have had two important effects. Firstly it would have enabled Warburgs to monitor with some accuracy who's joining the share register and who's leaving, so that it could reward those who buy shares and punish those who sell. But perhaps more important, it would also have outlawed virtually all meaningful short-selling of the stock ahead of the sale. According to some market-makers and investors, this would have created a false market in the shares and enabled Warburgs to set an artificially high price for its client, the Government. Such was the noise by the end of the week that the Warburgs plan had largely been scuppered, though there was a botched and ill-thought-out attempt by the Stock Exchange to find a compromise.

There is, however, an alternative way of looking at it. It can equally well be argued that what Warburgs was trying to do was actually rather daring and gutsy. If Warburgs had been acting in its own interests, as most merchant banks do in most transactions, it certainly wouldn't have risked the wrath of the institutions by proposing such a radical change in normal market practice; it would have told its client, the Government, to stick with the traditional methods. Friends in the City would have been guaranteed a much larger instant profit on the share sale and the client - us, the taxpayers - would have been that much worse off. Look what happened last year with the Wellcome share issue. Heavy short selling of the stock drove the price down from over pounds 11 to around pounds 8 in the months preceding the offer. Within a couple of months, the price was back to pounds 10. The vendor, Wellcome Trust, arguably lost about pounds 2 a share.

In the US, highly complex rules have evolved to govern share offers of the BT type and protect the vendor against the sort of self-serving market manipulation that investors pulled off to such effect with Wellcome. One of these is the so called 'up tick rule', which prevents any short-selling of the stock unless the last movement in the price is up. Settlement in the US is also on a rolling five-day basis, making concerted attempts to drive down the stock price ahead of a sale that much harder. No such rules exist in the London market. If City practitioners are to continue using the American book- building system to sell shares, which seems to be the future, a new infrastructure of market rules will have to introduced as a matter of urgency.