Exchange to push on with reform

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The Independent Online
JOHN EISENHAMMER

Financial Editor

The London Stock Exchange last night signalled that it will push ahead with share-dealing reforms to remain the financial centre of Europe.

It dismissed as incorrect the idea that the exchange's market-makers had hijacked the process for change and said it was pressing ahead to introduce an order-driven share-dealing system in August. Leading market- makers have conceded that change is inevitable.

The Stock Exchange is expected to issue tomorrow a detailed consultation document to ascertain precisely what sort of order-driven mechanism the market wants. One of the three main options is to stick with the status quo, the traditional quote-driven system dominated by the powerful market- making firms using their capital to offer continuous buy and sell prices for shares, and not have any order-driven facility at all. But this is widely regarded by market participants as unlikely.

The consultation will be the first time the broad market, comprising securities firms, big fund management institutions which own much of the country's equity, and the large corporates that raise capital through the exchange, is being comprehensively asked for its views on the share- dealing reforms. One of the contributing factors to the recent firing of Michael Lawrence from his post as chief executive of the exchange was the concern among many members that he was seeking to push through radical reforms without knowing what the market actually wanted.

The consultation is to be completed by mid-February, so that the Stock Exchange board can consider the recommedations by late March.

The other two main options in the document are to switch fundamentally to an order-driven mechanism, whereby sell and buy orders are automatically matched on the dealing screens, and some form of hybrid combining order- matching and a quote-driven system on the same dealing screens. While some form of combination of the two trading facilities is already regarded to be the most likely outcome of the consultation, a hybrid in the sense of the two systems on the same screen, which is what the Stock Exchange appeared initially to favour, is known to be fiercely opposed by most of the market-makers.

"The two systems competing against each other simply cannot work. Capital will be withdrawn from the market," one senior market-maker said.

Another suggestion, which some participants say is a more likely option, is a hybrid that is essentially a screen-based order-matching system, but which offers market-makers the opportunity to continue carrying out large trades off the market.

This would be akin to the systems operating successfully in France and the US, where there is an electronic order-matching sytem plus a block- trading facility, whereby brokers can take large positions onto their own books and then dispose of them before the trades go through the official market. The consultation document also offers highly-detailed variations on these options.

The steering committee that will make the recommendations includes John Kemp-Welch, chairman of the Stock Exchange; Graham Allen, managing director of the ICI pension fund; Donald Brydon, deputy chief executive of BZW; Scott Dobbie, chairman of NatWest Securities and Michael Marks, deputy chairman of Merrill Lynch.

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