Exchange in uproar over HSBC stock

THE debut of HSBC Holdings on the London stock market turned into a fiasco yesterday, when market makers said they would not deal in more than 500 of the Hong Kong dollar shares at a time.

Market makers and institutions protested at the confusion, which many blamed on the Stock Exchange's FT-SE 100 steering committee. One market maker described the reaction as uproar, and said it was ludicrous so few shares could be bought in a pounds 6bn company that includes Midland.

Investors, too, were alarmed at the nominal amounts available to buy and sell. Shortage of stock to buy led to a 5 per cent price premium for the HK dollar shares over the sterling equivalents, which trade alongside them.

There were complaints that the price differentials would make a nonsense of the FT-SE 100 calculations when HSBC Holdings enters the index officially on Monday. One investing institution was said to be prepared to take legal action if it lost money.

A spokesman for the Stock Exchange said he expected arbitrage between London and Hong Kong to solve the problem of price differentials over the next couple of weeks, with market makers building up their holdings in London. The size of trades would increase as a result.

The problem arose because the two types of share are to be traded alongside each other in London, now William Purves, Hongkong chairman, has gone wholly unconditional in the takeover of Midland Bank. Each price is calculated separately in sterling for the FT-SE index. The confusion began on Thursday, when market makers told the Stock Exchange that they would not deal in the HK dollar shares, because of a lack of stock in London, technical problems in settlement, and the need to pay to obtain stock in Hong Kong to sell in London.

Yesterday morning the FT-SE 100 steering committee met to discuss whether HSBC Holdings could continue in the index with its full weighting, given the inability to trade the HK dollar stock in London.

Index funds, which have built up positions in HSBC on the assumption that it would be fully in the index, feared that only the sterling shares would count towards the index. But sterling shares are only a third of the total.

Intensive efforts by James Capel, HSBC's brokers, persuaded six market makers to change their minds, but only to trade in lots of 500. The committee then decided the whole of HSBC could count in the index. Trading began at 2.30 pm.

One informed market source said he was 'amazed and appalled' at the behaviour of the FT-SE steering committee.

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