Exchange deals severe blow to market-makers

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The Independent Online
The Stock Exchange dealt another blow to the endangered business of market-making yesterday when it published recommendations that, if accepted, will put an end to the delayed publication of stock market bargains. The change, to coincide with the introduction of electronic order-driven trading in October, is designed to make the London market more transparent but some believe it represents another nail in the market makers' coffin.

The change in October to immediate notification of deals, no matter how large or small, will mark an end to the privilege market-makers have enjoyed of keeping quiet about large trades for up to 90 minutes in order that they can lay off the risk of holding shares before the market moves against them.

In an effort to even the playing field between the current quote-driven telephone based system of trading and the planned new system of electronically posted buy and sell orders, that privilege is to be ended.

The decision, which although still officially in the consultation phase is understood to be certain to go ahead, is a significant change from the situation in force as recently as last December when the powerful market making firms were insisting that their protection should be built in to the new system.

Yesterday's move effectively means the market makers have lost out to opponents of their privileges, including the Securities and Investments Board (SIB), the top City regulator, which has argued for greater transparency on the stock market. It represents a notable victory for the Stock Exchange only 15 months after Michael Lawrence, its former chief executive, was effectively ousted by the market-making firms he had crossed.

Others to have been unhappy with market makers privileges include the London International Financial Futures Exchange, LIFFE, which was unable to price some of its derivative products such as equity traded options with certainty because there was no guarantee that the market price was the price at which large recent trades had actually been transacted. Foreign brokers have also been unhappy that they might be dealing at disadvantageous prices compared to better informed local players.

The Stock Exchange has moved to level the playing field to try and ensure that enough market participants used the new system to make it viable. After recent embarrassments it would have been disastrous for the order- driven system not to have been credible.

The proposals include a changed regime for so-called "worked trades" where market makers will continue to be allowed to delay publication of a trade if the purpose of doing so is to improve the price or size of a large deal for a client. The Stock Exchange is expected to put in place systems to monitor these delays to ensure there is no abuse of the loophole.

Discussions with SIB are happening now to determine both the proportion of a worked trade that must be completed before a bargain becomes notifiable and the size of such a deal that will qualify for the exemption. SIB is understood to favour a deal no smaller than 10 times the normal market size, or about a quarter of the average daily volume in a stock. There is still debate about how big a deal must be before publication can be delayed beyond the end of the working day.

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