Liffe in rush to online trading

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The Independent Online
LIFFE is expected to announce that it is speeding up its shift from pit trading - where men in brightly coloured jackets flap hand signals at one another - to online screen trading popular with investors seeking transparency and cheap dealing costs, according to City sources.

The announcement, due after Liffe's board meeting on Wednesday, will extend the Exchange's commitment to begin trading UK equity options on screen from 30 November.

A shift of a second batch of futures and options contracts to Liffe's on-screen system is scheduled for the second quarter of 1999, but at least part of this second batch will now be brought forward, the sources say.

Liffe's move was prompted by its thrashing at the hands of the Frankfurt- based Deutsche Terminborse in the battle to be Europe's dominant derivatives market. By this summer, the DTB was so successful that an empty space appeared in the middle where the bund pit used to operate.

Last month Liffe elected Brian Williamson, who built up the Exchange in the 1980s, as its chairman for the second time. He quickly put together a Fast Progress Group, composed of four insiders and four outsiders, led by Lloyds TSB chairman Sir Brian Pitman, to undertake a review of Exchange strategy.

"We think moving UK equity options to our Connect computer system is going to be a great success," said Liffe equity automation senior associate Nick Bramley.

The move to online trading of derivatives contracts, allowing investors to speculate on, and hedge against, future movements in financial markets, has been long been held up by the Exchange's locals.

Locals are individuals backed by private capital trading for their own accounts. They are often pitted against the Exchange's institutional members. They make their profits by observing the flow of funds at the institutional level and positioning themselves ahead of this flow. The locals says this brings needed liquidity to Liffe. But the Exchange's big customers reply that it jacks up dealing costs, while making it difficult to get a handle on firm prices until after bargains have been struck.

Taking advantage of the discontent of institutional customers, futures and options exchanges in Amsterdam and Stockholm as well Frankfurt have wooed away increasing slices of business from London. The DTB, which is closely tied to Germany's stock exchange, linked up with the Swiss derivatives exchange to create Eurex and sought out further mergers.

Mr Williamson's strategy in seeing off this challenge is to go back to basics and ask customers trading futures and options contracts worldwide what they want from London. Two ideas appear to be crystallising.

The first is a merger of Liffe with the London Clearing House, which settles the contracts traded on many of London's exchanges. This would help position Liffe for the brave new world of electronic trading, in which investors could deal from anywhere in the world.

The second idea is to put Liffe more at the centre of over-the-counter futures and options trading.

"You could well see major announcements in both these areas," said a source at Liffe.