`End Exchange's share trading monopoly'
Saturday 18 March 1995
"If the obligation on market-makers to display their best prices on the Stock Exchange Automated Quotation system is removed this should increase the potential for exchanges to compete, and for the market to determine the future development of each system," said Sir Bryan Carsberg, Director General of Fair Trading.
The report also condemned the exclusive access of market-makers to the best share prices which are only displayed on the inter-dealer broker network. This is significantly anti-competitive, and should be opened up to all market participants, the OFT argued.
The report is part of a broader look by the OFT, along with a separate investigation by the Securities and Investment Board, into the workings of the financial markets and how London's competitive position as an international centre can best be improved. The SIB will present its review in the late spring, and it will then be up to the Chancellor to recommend reforms.
Sir Bryan's attack yesterday went to the heart of the current debate in London over the respective merits of a "quote-driven" dealing system, such as the one the Stock Exchange operates, and the "order-driven" system common in most other financial centres.
In a quote-driven system, market-makers are the principal actors, quoting the prices to investors at which they are willing to buy and sell shares. An order-driven system is more mechanical, matching anonymous buy and sell requests between customers. This places much less emphasis on skilled traders responding to the nuances of the markets, but only works properly when there are people wanting to buy and sell a particular stock.
A quote-driven system always functions and is immediate, because market- makers have to make markets. An order-riven system tends to be cheaper in terms of dealing costs. By breaking the rule reserving best share prices for the Stock Exchange, the OFT wants investors to have a choice of dealing systems, and let the market decide which should prevail.
"It is not my role to advocate either system, but I am concerned that the development of order-driven markets in London should not be artificially inhibited by rules which limit the business they can attract," Sir Bryan said.
Many large foreign institutions find the peculiarities of the London system difficult, and want to be able to choose how to deal. At present, only Instinet offers an order-driven system within the Stock Exchange's rules. Another small organisation, Tradepoint, has applied to be a rival order-driven exchange. "If it makes a go of it, we could see other organisations moving rapidly to do the same thing," an OFT official said.
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