A new era in share dealing is breaking in Britain. But the London Stock Exchange, fearing the first challenges to its monopoly, does not like it one bit.
The start-up today of the first share-dealing service on the Internet, a joint-venture between Electronic Share Information of Cambridge and the discount broker Sharelink, has been thrown into confusion by the sudden decision of the Stock Exchange to go back on an agreement to provide real- time share prices to the new venture. From the end of October, when the current trial period contract expires, the price information feed will cease, apparently out of fears for security on the Internet.
The move betrays a sense of panic, as the Stock Exchange reacts to competition, which will become much more serious on 21 September with the advent of the first rival exchange, Tradepoint. It will introduce to the City the electronic, order-driven dealing system common in most international financial centres, where buy and sell orders are automatically and anonymously matched.
These newcomers are minute compared to the establishment might of the Stock Exchange. Electronic Share Information and Sharelink appeal to private clients; while Tradepoint hopes to capture 2 per cent of the equity market next year. But the Stock Exchange is warning against the fragmentation of the market and the cost perils in this new competition. It fears this is the small beginning of a potentially dramatic development.
There has been a significant shift in the balance of regulatory sentiment, as the OFT and the Securities and Investment Board, the main City watchdog, have called for curbs on the privileges accorded market makers, the powerful member firms of the exchange which drive the market by quoting prices to investors at which they are willing to buy and sell shares. They want to scrap restrictive practices at the exchange, such as not allowing better share prices to be quoted elsewhere.
The changing face of the City has also left the Stock Exchange behind. Big foreign dealing houses now dominate, which are less wedded to the vested interests of the market making tradition. Moreover, with the rise of big integrated investment banks, the nature of trading has changed. Only a few houses are market makers in the old sense of providing a service. Many, taking advantage of Stock Exchange privileges, are essentially making money for their firms as proprietary traders. This perceived abuse of a system that has otherwise served the City well has provided the impetus for demands for greater transparency and competition from the regulators.
The Stock Exchange was ill prepared for the currents turning against it. The big market making firms which dominate its membership have long resisted changes to the system which earned them handsome profits. Now the monopoly is cracking, and the exchange is seeking a new agility, placing its activities under thorough review.
There is a widely-shared view within government, the regulators, big institutions and member securities houses that the exchange has lost its way. But this does not imply a switch in support to the alternatives. Some 50 clients have signed up for Tradepoint's start, but many more institutions are waiting to see whether it really will cut London's uncompetitively high dealing costs. But there is also concern about where these changes might lead the City. It will be the first major centre with exchanges competing for the same stocks. Market making margins are already squeezed; if Tradepoint undercuts them much further, firms could pull out, reducing the liquidity that has been a main attraction of the London market.
But the Stock Exchange is not taking chances. It is speeding up the introduction of its new Sequence system which will give it an order-driven dealing capacity by next year.