COMMENT : Time heads are banged together at Exchange
'If the Government chooses to sit on the sidelines while the equity market splits even more decisively between the wholesale and retail components, we will know just how much it really cares about the Sids'
Saturday 06 January 1996
However the Stock Exchange eventually answers that question, there are other parties with a legitimate interest in the outcome. There is the Bank of England, with its longstanding concern about London's continued vitality as an international financial centre. And small investors have a right to be worried about any decision that leaves them even further out in the cold.
Ten years ago, the Stock Exchange lost an empire - but appeared to pull off the trick of finding a new one. Gone was the cosy club that presided over a cartel of jobbers and brokers, who earned rich rewards from minimum capital. Gone was the physical presence of the stock market at the Exchange in Throgmorton Street, as Big Bang led to a scattering of the market-makers to all quarters and the onset of screen-based trading.
Despite these revolutionary changes, the Stock Exchange retained a crucial role in the new devolved market by presiding over Seaq, the system that disseminated the price quotations of individual market-makers to the market at large. It also continued to underpin the settlement of the market through Talisman. Through providing these crucial services, the Stock Exchange was able to participate in the remarkable expansion in equity trading in London in the late 1980s. When recapitalised City security houses grabbed a large share of international trades, particularly in European equities, the Stock Exchange, by now grandly renamed as the International Stock Exchange, shared in the glory.
The 1990s brought a rude awakening as the Stock Exchange was caught on the wrong foot again and again. While other financial centres successfully modernised their settlement procedures, London's trailed behind. Taurus, the all-singing and dancing attempt to regain lost ground, had to be abandoned - costing the job of Peter Rawlins, who had been brought in to oversee the project. The Bank of England had to step in as project manager for the replacement project, Crest, with development capital of pounds 12m provided by a consortium of 69 firms.
The Bank's intervention served notice on the Stock Exchange; if it could not carry out a key strategic function - the modernisation of settlement - then the City would not wait indefinitely. At the same time, the new system aroused legitimate fears that small investors would be short-changed, with higher costs through the use of nominee accounts. One of the key reasons why Taurus foundered was that it had unsuccessfully attempted to square every interest in settlement, from custodians and small investors to the big market-makers. Crest, by contrast, was specifically designed for high-value transactions.
Now the Stock Exchange faces an even more fundamental challenge in the form of order-based rather than price quote-based trading. Despite Tradepoint's slow start, the economies from order-based trading are proving a successful attraction for rival financial centres in winning back business from London. The strategic interest for London as an international financial centre is therefore to have such a system. However, that militates against the commercial interests of the big market-makers who dominate the board of the Stock Exchange.
Despite their opposition, such a system will come to play an important role in London as elsewhere. Whether it does so under the auspices of the Stock Exchange is another matter. The example of Crest should serve to concentrate the minds of those still doubtful of the need for the exchange's new trading system, Sequence VI, to incorporate an order-matching system for big company trades.
The alternative is fragmentation of the market. The Bank of England's view is that the development of competing markets will not operate against the interests of the City as an international financial centre or the small investor. Yet while the big players, both institutional investors and market-makers, can be expected to thrive under the creation of a premier league market, small investors might well lose out.
If the Government chooses to sit on the sidelines while the equity market splits even more decisively between its wholesale and retail components, we will know just how much it really cares about the Sids whose money it sought so seductively in the 1980s.
Tackling Murdoch over sports monopoly
Upsetting Rupert Murdoch is a dangerous game for politicians - particularly those in such a parlous state as the present Government. Despite this, John Major appeared to throw caution to the winds yesterday by going public on his opposition to Mr Murdoch's growing monopoly of TV rights to big sports events.
Three cheers for Mr Major. The trouble is that what he was proposing by way of remedy didn't amount to very much - a move to beef up protection for the handful of listed events that are currently available on "free" TV, such as Wimbledon and the FA Cup Final.
Mr Murdoch has not moved on these, even though he could do so under the rules. The current legislation merely prohibits the exclusive broadcast of the listed events on pay-per-view basis - a market that does not yet exist in the UK. Nothing precludes a pay-TV broadcaster from pitching for the rights to, say, the FA Cup.
To date, BSkyB has been perfectly content to sew up the live rights to major matches, allowing one of the terrestrial broadcasters to show a few big-ticket fixtures. Even in the most recent Football League deal, which includes a listed event, the FA Cup Final, BSkyB has decided not to rock the boat. Under the arrangement, the Final will be shown on ITV.
By tightening the rules on listed events, for instance through prohibiting all pay-TV exclusive broadcasts, Mr Major's Government would merely pre- empt any future raid by Mr Murdoch and his associates. If the Government really wants to rein Mr Murdoch in, it will have to do a great deal more. But first, it ought to wait to see the outcome of the Office of Fair Trading inquiry into, among other things, the exclusivity deals signed by BSkyB and major sporting organisations. If these are shown to be anti-competitive, BSkyB may have to change its strategy.
Even then, Mr Murdoch's deep, deep pockets may be hard to offset. His pay-TV empire in the UK is now so profitable that few can hope to challenge him when it comes to bidding for rights. The most a laisser-faire Government can hope to do is jump hard on any anti-competitive behaviour (restrictive practices, predatory pricing) and hope that other media companies find the money and guts to take the kind of risks Mr Murdoch was prepared to run.
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