Fears mount over Stock Exchange

CONCERN for the future of the London Stock Exchange is growing in the wake of its move last week to a five-day settlement period in an effort to keep up with its international rivals.

Critics in the City say the exchange is in a state of confusion, its wealth of history outweighing its sense of future direction.

"It spends far too much time looking over its shoulder," said John Manser, chief executive of Robert Fleming, the investmentbank.

The LSE is counting on a report from Fields Wicker-Muirin, its American director of strategy, to point out a new direction. But the obstacles she faces are daunting.

The Exchange's problems arise not just from foreign competition, but from a wealth of new ways for corporations to raise equity domestically, such as convertibles, warrants and derivatives.

Attempts to prepare the Exchange for the 21st century have been hampered by its multiplicity of roles - as commercial entity, trade association and regulator.

Many Continental stocks are traded in London, and other bourses abroad face the same concerns as the London Exchange. But some critics say that London's distinctive quote-driven system, which allows for continuous trading but can make it less transparent when there are large trades, is a handicap. As a result, the Exchange is facing challenges from a growing list of alternatives led by Tradepoint, an order-driven market, which is set to start trading next month.

"It is surely only a matter of time before one of [the alternatives] strikes home," says David Jones, chief executive of ShareLink and a former stock exchange board member.

The Securities and Investments Board and the Treasury have both expressed their concern in recent weeks over the possibility that some of the exchange's privileges may be anti-competitive.

Market-makers, who undertake continuously to offer to buy or sell any share, are entitled to a number of special concessions in return for the risk this commitment rep-resents.

The most important is the ability to hide big trades from the market for a limited period. The leading market-makers wield considerable clout at the Exchange. But the SIB's review two weeks ago proposed that this period should be reduced and a fight-back by the leading marketmakers may ensue.

Some critics claim that the market-making system has failed to create adequate liquidity for small company stocks.

But there are signs that the exchange's commitment to the quote-driven system may not be absolute.