Don't write off the City just yet

News Analysis: London can fend off attacks on its financial leadership
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The Independent Online
LONDON'S STOCK Exchange under pressure, London's futures and options exchange losing market share, the UK sitting out the first wave of EMU - are the days of the City of London numbered?

If all the recent rhetoric in the press is to be believed, dealers in the City might as well pack up and go home. First of all, we had apocalyptic predictions of the job losses that EMU would cause. Then there was the fuss about Liffe - London's futures and options exchange - which first managed to lose the bulk of trade in the German government bond future to the Frankfurt-based Deutsche Terminborse (DTB), and is now, for the first time, facing competition for UK gilt future trade. Most recently, London's Stock Exchange was put in the spotlight when Nasdaq, the US's number two exchange, said it was talking to the Deutsche Borse.

It is undoubtedly the case that, if the City were to lose its place as Europe's leading financial centre, there would be wide-ranging implications for the rest of the UK economy. According to the Corporation of London: "The City of London puts around pounds 20bn each year into the UK economy. If the City were to fail - or even momentarily stall - the whole country would be affected." A report published last week by the Centre for Economics and Business Research predicted that 116,000 European jobs could go if the City of London were to falter.

But is the City's future as bleak as some of the pundits like to make out?

Take Liffe first. Liffe has managed to lose the bulk of the trade in the bund - the German government bond future - to the DTB, through a combination of managerial errors, a reluctance to adopt electronic trading, aggressive marketing by the DTB and political pressure from the Bundesbank.

Last week Matif, the French futures exchange, announced plans to challenge Liffe's monopoly in the gilts future. The DTB is also expected to join the fray soon. Given Liffe's spectacular failure to hold on to its bund market share, some in the City were gloomy about its chances of success in a three-way battle for the gilt future. Others, though, were less hasty to write off Liffe's chances.

Ed Condon, head of European listed derivatives at Credit Suisse First Boston, is among the optimists. He said: "Liffe has a 100 per cent share of the gilt. The other exchanges will need to do something completely different to persuade people to switch."

Matif and the DTB are hoping that their electronic trading system will make the difference. Liffe's new electronic system is not due to come on line until early next year. But Mr Condon believes that national factors are likely to come into play. He said: "In the case of the bund, the Bundesbank brought pressure to bear on the German banks. The Bank of England will not be sympathetic to losing the gilt contract to Frankfurt, and could bring its influence to bear."

Liffe, unsurprisingly, is tight-lipped about its relationship with the Bank of England. One City source chuckled: "Liffe is incredibly sensitive about its relationship with the Bank. You'll never get them talking publicly about it."

Liffe is not the only City institution facing competitive pressure from abroad. On Monday evening, Nasdaq and the Deutsche Borse admitted they were in talks. Nasdaq said the two "had agreed to set up a working group to explore common transatlantic business opportunities. It's part of the strategy of the Deutsche Borse and Nasdaq to develop co-operation and alliances with important stock exchanges". Some were quick to construe this as a competitive assault on the London Stock Exchange (LSE). Others in the City, though, believe the position of the LSE is relatively safe, for the time being at least.

One City source, who declined to be named, explained that the position of the Stock Exchange was quite different to that of Liffe. In the case of Liffe, she said, rival exchanges can unilaterally decide to, say, launch a gilt contract, and then persuade the traders to use their dealing system rather than Liffe's. The source said: "In practice, for Nasdaq and the Deutsche Borse to win substantial market share from the Stock Exchange, they would have to persuade UK-based companies they would do better listing on a foreign stock exchange rather than in London. I think national factors are just too strong."

Many traders believe that the most likely casualty of a Nasdaq/Deutsche Borse link would be Easdaq, the European version of Nasdaq, which focuses on European growth stocks. One said: "To be frank, Easdaq hasn't been as successful as we'd all hoped. If Nasdaq and Deutsche Borse join forces, or perhaps launch a pan-European product, it's Easdaq which has the most to lose."

Others in the City say it is over-simplistic to view recent market developments as a European assault on the City of London, and point out that all exchanges are struggling to cope with intense competitive pressures. Nasdaq is locked in a fierce battle for market share with the New York Stock Exchange (NYSE). Deutsche Borse has other regional exchanges to contend with. All exchanges are having to come to terms with both the impact of technological change as well as the disappearance of most of the major European currencies after EMU.

One source close to the London exchanges said: "I can see a post-EMU world where exchanges specialise. You may have a series of national exchanges catering almost exclusively for national companies. You then could have one, or may be two, pan-European or global exchanges catering for large multinationals."

Others City figures have talked about the possibility of increased co- operation between Liffe and the LSE, saying that once Liffe is fully electronic there will be greater synergies between the two exchanges.

The advent of the euro, and, perhaps more importantly, the unrelenting pace of technological change, means that the City will never be the same again. But it is equally true to say that the future is not quite as bleak as some like to believe.

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