Exchange firms want time to make changes

JOHN EISENHAMMER

Financial Editor

The Stock Exchange is expected to recommend a mixed system of share trading in London following publication yesterday of the results of its largest market consultation programme. The responses exposed deep rifts over replacing London's traditional market-making system with the kind of electronic dealing system common in other major financial centres.

The consultation showed broad support for reform and widespread expectation that some form of order-driven dealing system will be introduced. But it also revealed opposition among the most influential single group of powerful market makers and big institutions. The responses called overwhelmingly for more time to prepare for the changes.

"The message is not as clear as we would have liked, but there is a mandate for change" said an exchange source. A recommendation for change will be put to the Stock Exchange board on 21 March. There will then be a second phase of consultation on the details and timing.

Most firms felt that between nine and 12 months would be needed to develop and test systems after the detailed regulations for the new structure were released.

The exchange is expected to recommend a three tier-system, which would introduce order-driven dealing for small trades in the top FTSE stocks, while enabling the traditional market making system to continue for medium to big trades, as well as negotiated deals for the very large trades.

This would allow market makers to continue to dominate trading, with the exchange hoping that the size of trades done by order-driven dealing can be expanded progressively.

The forthcoming battle will revolve around the initial size of trades to be allowed on the order system - and how they will interact with the large, block trades conducted by the market makers.

Comment, page 21