Market makers fear crackdown

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The Independent Online
Big City firms are forming a common front to head off the threat of the Stock Exchange tampering with their market-making privileges. The exchange is currently drawing up questions to put to its members and large institutional investors, looking in particular at the market-makers' exemption from declaring stakes they build in companies.

The urgent consultation has been prompted by the controversy surrounding the role of Swiss Bank Corporation in Trafalgar House's bid for Northern Electric. Questions have been raised about the unusually large - 8 per cent - stake taken by SBC in another power company, Yorkshire Electricity, which was concealed behind market-makers' privileges until revealed by a section 212 notice.

SBC's action prompted an uproar in the City, mixed with much admiration for its innovative use of derivatives in the deals. The Department of Trade and Industry said it was now looking in detail at whether SBC's activities breached insider dealing regulations.

The Stock Exchange, which cleared SBC of any improper action, said its consultation would examine whether additional disclosure by market-makers was needed in the public interest. It would also inquire whether further rules were needed concerning the impact of derivatives.

While the big dealers remain fairly relaxed about the consultation on derivatives, there is deep concern that their market-making privileges might be curbed. "We are very worried that the exchange is now going to home in on the market-making privilege simply because of the coach and horses driven through the gentlemen's club by SBC," said the senior executive of one City firm.

Some institutional investors feel that the application of the market-maker's exemption from disclosing stakes is being applied too widely.

"There clearly is a question whether these privileges can be abused from time to time. On this particular issue, one may wonder whether the rules have been abused," said Geoff Lindey, chairman of the investment committee of the National Association of Pension Funds.

The market-makers themselves are comparing the threat to their privileges provoked by SBC's innovations with the effects of the aggressive take-over practices used by Morgan Grenfell in the mid-1980s. "As a result of Morgan's style, the rules were changed, and the result was the markets were made less efficient," a City executive said. "We have to guard against a change that is to everyone's disadvantage just because one firm has pushed up against a particular rule."

Market-makers argue that they need to be able to delay disclosure of a stake in a firm, because if everyone could see them building a position they would not be able to make liquid markets.

Rodolfo Bogni, SBC's London chief executive, said he was confident that common sense would prevail and there would be no rash changes. "I would want to make sure that the level playing field between cash and derivatives is not altered, simply because derivative-type products are more efficient," he said.

Mr Bogni warned that restricting the use of derivatives of the sort used by SBC in the bid for Northern Electric would work against London and in favour of other centres such as Paris or Frankfurt.