The Board of the Stock Exchange is expected tomorrow to announce a delay in the detailed consultation of the market about the introduction of the new equity trading system next year. Sources said the Stock Exchange feels it needs a clearer idea of what privileges for market-makers the regulators agree are acceptable for the new system before consulting with investment banks and institutional investors on the precise details of how the new system should operate.
The negotiations have re-opened the wounds of a sensitive debate that was only partially settled last year when, after several OFT reports complaining that the privileges that the big market-makers distorted competition, the Chancellor of the Exchequer accepted a compromise whereby the publication delays were shortened. Under the new rules, 75 per cent of trade by value must be published immediately.
Yesterday John Bridgeman, director general of the OFT, told MPs at a Select Committee: "We would like to see immediate publication for all trades. That is our ultimate objective and we believe it is possible to go further than the 75 per cent rule."
Mr Bridgeman was giving evidence to the Treasury Committee as part of its inquiry into the Stock Exchange prompted by the sacking of its chief executive, Michael Lawrence, at the beginning of this year.
Mr Bridgeman made clear that in the current talks with the Stock Exchange the privileges accorded market-makers, the big firms that drive trading by quoting continuous buy and sell prices for shares, and especially the ability to delay informing the rest of the market of a big trade so they have time to offset their risks, is the OFT's main source of anti-competitive concern. The OFT is less worried, he said, about the privilege exempting market-makers from stamp duty.
The radical reform of share trading in London being worked on by the Stock Exchange proposes to introduce an electronic system that automatically matches buy and sell orders around the summer of next year.
Initially, however, this order-driven capacity is likely to be relatively limited and alongside it will be a facility for block trades carried out by the market-makers committing large amounts of capital. The market-makers are arguing that for this to succeed they will need similar privileges under the new system to those they enjoy under the current quote-driven mechanism.
As a consequence of the difficult negotiations on these privileges, the Stock Exchange is expected to put off the next stage of its consultation process on the order-driven reform. A first consultation showed that there was broad-based support for some order-matching system, similar to that used in all other main international financial centres.