How the demands of large investors are squeezing out private players
STOCK MARKET WEEK
Monday 18 August 1997
He declares: "The policy makers in the [Stock Exchange] Tower have to look beyond the desires of the international set, who now, in the main, own our financial companies and merchant banks.
"They want - and have managed - to change the system to suit themselves and turn it into a wholesale market that will allow them to satisfy their in-house trade, take out risk and abrogate their responsibilities to the retail market."
Mr Winterflood, who runs Winterflood Securities, reflects the anxiety of many private investors who resent the stranglehold of the Crest computerised settlement system and the way they are squeezed to satisfy the demands of the large investment houses.
There is a justifiable desire to keep the market at the forefront of the international investment community. But in the rush to accommodate the big houses the needs of the small investor have been largely ignored. As one market personality observed: "The Stock Exchange just plays lip service to the need to encourage private investors; it doesn't really care about them."
With many investors herded into nominee accounts, often charged more if they want share certificates and threatened with fines if they cannot meet the increasingly tight settlement deadlines, there has been little, if any, attempt to improve the lot of the small player since Big Bang 11 years ago.
The small shareholder, however, is an important part of the market and the lifeblood of many smaller, private client stockbrokers.
The arrival of order-driven trading in October is another development not designed to help small companies or indeed small investors.
One question is whether order-driven, as opposed to price-driven, trading should be adopted for all companies.
Initially it will be confined to Footsie stocks with the FTSE 250 constituents embraced soon afterwards. Whether the rest will follow is the subject of anxious debate. Current Stock Exchange thinking would appear to favour order-driven trading being confined to the top 350 shares.
Mr Winterflood, whose speciality is smaller companies, fervently hopes the rest of the market will not be dragged into the new order. "Anything below the indices should remain price driven," he says.
The market, he adds, has "a plethora of small companies, and for that matter not so small, which do not have a great deal of free equity available to provide the necessary liquidity. We need to remember the vast majority of our companies are more akin to the corner store than the supermarket.
"Our price-driven system helps to correct that situation by having risk takers - market-makers who provide firm twoway prices in reasonable amounts of stock to allow real-time trading for all and give institutions the ability to value their portfolios.
"Immediacy of trading is, I suspect, very important to private investors and institutions."
He is in the forefront of the campaign to split listed shares into three categories - a big board embracing the top 350; then a market for the next 1,750 with AIM continuing its present function. "These sectors to be governed separately with necessary adjustments to rules and regulations and, hopefully, tax breaks," he suggests.
Mr Winterflood, whose market-making company is part of the Close Brothers investment group, says: "We must be careful we don't lose what has taken so long to create - that is a market for smaller companies to find seed capital, not to be held hostage by the banks. These smaller businesses are frightfully important for our economy. The way we raise and trade smaller companies is the envy of Europe and I suspect many other markets around the world."
Last week's equities performance was remarkable for the continuing revival in the supporting shares and Footsie's Friday collapse. The FTSE 250 index and FTSE Small-Cap index made headway. Their comeback was in sharp contrast to the indifferent display by Footsie, which weakened 166.1 points over the week.
The supporting players still have a long way to go to equal their Footsie peers. But their performance in the past two weeks suggests institutional investors have decided real bargains now exist on the under card.
Financials could still be the key to Footsie's behaviour. If they crack - and many gave ground last week - Footsie would be hard-pressed to retain momentum, the astonishing bull run would be over and, perhaps, so would the supporting stocks' revival. Still, despite its retreat, Footsie is only back to its level of three weeks ago.
With the holiday season in full swing the flow of company results is down to a trickle.
Still, this week's list includes two Footsie constituents - Halifax and Rentokil Initial.
It will be the first time Halifax has graced the market's profits schedule. Its interim figures on Thursday are the first since its flotation. Surprises are not expected. James Johnson at Credit Lyonnais Laing is looking for pounds 756m against last time's pounds 649m. Former members who kept their shares are unlikely to receive any interim dividend.
Rentokil has to contend with its self-inflicted 20 per cent earnings growth target.
Although chairman Sir Clive Thompson must regret his rashness in committing himself to such an objective he should have little trouble with Wednesday's interim figures.
They will include many of the earnings-enhancing benefits of the BET acquisition. Paul Morland and Andrew Nussey at NatWest Securities expect profits to be 47 per cent higher at pounds 198m but suggest there may be problems meeting the earnings target over the full year.
Argos, the catalogue stores chain, chips in with interim figures today. It has warned they will be lower. The market is looking for pounds 27.5m, down from pounds 31.8m. Monument Oil & Gas on Friday should manage interim earnings of pounds 7.5m, up 10 per cent.
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