City: Vanishing Chinese walls

THE CITY'S market-makers were less than amused by the Office of Fair Trading's decision last week to hold yet another investigation into their activities, to ensure that they are still operating in the public interest. It last carried out this exercise six years ago and found nothing to offend it.

Brokers and institutions claim that the so-called Chinese walls separating the different departments of some integrated securities houses are non-existent when it really matters. Integrated houses are the businesses that combine a market-maker with a broking operation and a merchant bank. The concept has been under suspicion ever since it became widespread as part of the Big Bang deregulation in 1986.

At first, the companies involved made solemn promises that breaches were either impossible or, if discovered, would be dealt with severely. That is still the official position. It is pure fantasy.

This is not to doubt the integrity of those at the top of these big groups. But human nature being what it is, life on the trading floor is rather different. If a takeover bid or a placing is in the offing, it is all too easy for a corporate finance team to tip off the market makers to adjust their books - and their prices. This can take the form of front-running, in which the market-making arm buys or sells as appropriate ahead of an announcement. That can be highly dangerous, as it can involve the criminal offence of insider trading. Less controversial but no less corrupt, if an analyst from one of the big firms picks up a useful nugget, it is highly tempting to tell the sales and market-making people before his clients.

These abuses are said to be rare. Unfortunately, we can only take the integrated firms' word for that. However, where there is considerable money to be made at the cost of a stroll across an office or a drink in a nearby wine bar, that money will tend to get made - with or without the prompting of senior executives.

The OFT should look at much tighter policing. Because of the physical proximity of different departments, effective policing is going to have to be extremely elaborate and labour-intensive. The problem is not above having doors watched and telephone tapes monitored - and then the pressure turns on to the policers.

The fact is that the problem has so far been taken nowhere near seriously enough, considering the millions of pounds at stake every day.