Outlook: Liffe will have to change quickly

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The Independent Online
IT'S A FUNNY thing about the City, but this hugely successful, highly innovative, dynamo of modern capitalism has a big problem with change. Its institutions and markets don't like it; invariably they have to be pushed into necessary reform by policy-makers, regulators and other outsiders, and they always do it grudgingly, under protest. It is hard to avoid the conclusion that left to its own devices, the City would long ago have assigned itself to the dustbin of history as a leading financial centre.

Thus the Stock Exchange had to be forced by the government of the day into abolition of fixed commissions and dual capacity. Later, order-driven trading had to be bulldozed through the powerful vested interests that stood in its path. Much the same is true of the City's other leading markets.

The London International Financial Futures and Options Exchange (Liffe) seems to be another case in point. This has been an undeniably successful market since it was established some 15 years ago, and it continues to grow like Topsy. Just recently, however, it has been overtaken by the Deutsche Terminborse in Frankfurt on the key bund futures contract. While this is only one of a large number of futures contracts, many of which are still overwhelming dominated by Liffe, it is the most widely traded in Europe and it could be a harbinger of things to come.

Liffe has not only been slow to respond to this competitive challenge; for a long time it positively resisted the screen-based trading systems that would enable an adequate response. The reasons for this are many and varied but the most important is that the market is mutually owned by its members. Many of these are so called "locals", individual freelance traders with a big vested interest in the present, open outcry method of trading. Their livelihoods and jobs depend on it, and as a result they have been behaving like modern luddites.

The necessary screen-based, open-access systems will probably be voted through at next month's extraordinary meeting, but it has taken a wave of adverse publicity, the resignation of a board member and a serious thrashing by the Germans to make it happen.

It is vital, then, that the exchange moves swiftly to deal with the nub of the problem - slow, too little too late, decision making caused by mutual ownership. Separation of ownership from membership through a stock market flotation should be put forward not just as an option at next month's meeting, but posed as a vital necessity. Liffe has become too important a market to be held back by vested interest.