Comment: Stock Exchange pushes the City from pole position
Friday 01 December 1995
Once the London market moves that way it loses its unique, poll position in Europe and just becomes part of the crowd, one of many. You and I could set up an order-driven trading system. All you need is a good computer; most of the European bourses already have one. By moving over to it, the London Exchange is copying the others. Though this may be just bowing to the inevitable - this sort of trading system seems to be what everyone wants these days - it is none the less a sad day for the City for it marks formally the beginning of the end of its pre-eminent role. It will take a good few years yet, but in time it won't much matter where you trade - London, Paris, Milan, Frankfurt or even Bombay for that matter.
All of which may make Merrill Lynch, SBC and Dresdner look a little silly. The prices they paid for Smith New Court, Warburg and Kleinwort Benson are suddenly looking rather generous. It is no secret that one of the great attractions of these City firms for their foreign owners was their lucrative market-making businesses. Smith New Court makes as much as 40 per cent of its money from market making. The quote-driven system is the hallmark of London; those who want to deal have little choice but to go through these powerful middlemen. The advent of order-driven prices alongside the quote-driven ones turns market makers into an endangered species.
The order-driven system dispenses with middlemen, offering the automatic and anonymous matching of buy and sell orders on the screen. If you place the two systems on the same screen for the same stock, as some advocate, the inevitable result will be to squeeze to almost nothing the margins that market makers exploit.
Michael Lawrence, chief executive of the Stock Exchange, hopes this belated revolution will stop the rot and shore up London's position. Will it hell. Ironically, it was the unrivalled skills and expertise of the market makers that gave London such an edge over the rest of Europe. The world has move on, and the Stock Exchange lamentably failed to seize the moment when it should have done several years ago.
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