Exchange sets date for new trading system

Tom Stevenson

Financial Editor

The Stock Exchange will this week announce that its new automated dealing system will start trading as expected on 20 October. The introduction of order-driven trading, which has been described as more important than Big Bang 10 years ago, marks a dramatic reduction in the power of the market-making firms that have until now dominated share trading in the City.

The new system of trading, which the Stock Exchange hopes will make London more attractive to overseas investors, will initially apply only to FTSE 100 stocks but is expected to be rolled out quickly to include the 350 biggest stocks on the market. If London follows other markets which have introduced electronic order-matching dealing systems, the volume of share trades could rise dramatically.

Currently market-makers act as wholesalers of shares, quoting throughout the trading day the prices at which they are prepared to buy and sell the shares they are registered to deal in. The new order-driven system means brokers will bypass the market-makers, posting their buying and selling intentions on screens which will automatically match buyers and sellers.

Orders will remain on an electronic "book" until execution, or the order is deleted, or the specified expiry time for the order is reached. Investors will also be able to negotiate trades separately from the order book directly with member firms.

The new system is expected to sharply reduce the costs of dealing in shares by in effect eliminating the market-maker's dealing spread. Brokers' commissions should also fall, increasing the competitiveness of London as a market for equities.

Order-driven trading is expected to reduce the number of dealers at market- making firms, although traditional telephone trading will still be possible in the biggest stocks and for the time being will remain the only way of dealing in smaller shares. The change will, however, vastly increase the potential for computer-generated trading.

Last week the Securities and Investments Board approved plans for a move to immediate publication of trades once they are completed. An important part of the new order-driven system, the Stock Exchange believes this will ensure greater transparency, making the London market fairer and more efficient. Only in the case of very large trades (of more than eight times the normal market size) will a publication delay be allowed to prevent the price moving against the seller in the middle of a deal.

Although trades will initially only be possible between Stock Exchange member firms, it is thought to be only a matter of time before big investing institutions press for the right to conduct deals directly. It is thought unlikely they will tolerate paying commission to a broking firm when increasingly all the broker is doing is entering details of a client's intentions into a computer. Many US institutions are understood to be underweight in UK shares precisely because they feel that the British system makes dealing in London bad value for money.