Outlook: The right diagnosis, shame about the remedy
Outlook on the proposed solution to the problem of sets, the risk of a global stock market crash, and the contrasting fortunes of BT and C&W
Friday 29 May 1998
It reasons that by opening the market half an hour later, it will overcome the lack of liquidity that has made Sets such a lottery early in the day and helped drive 70 per cent of share trades off market or back into a skewed and grossly unfair version of the old quote-drive system.
In fact, so convinced is the Exchange that the reforms will work that it has promoted the architect of Sets, Martin Wheatly, onto its main board. However, if Mr Wheatly has any sense, then like the big market makers, he will simply use this as an excuse to spend an extra 30 minutes in bed and then continue to behave in exactly the same way. Which is to stay well clear of the market for the first hour or so until the pattern of trading has settled down.
The Exchange's other solutions - aligning its hours with Liffe and changing the way the index is calculated will help iron out the problem of rogue closing prices, but still do not address the fundamental issues.
The central problem with Sets, which the Exchange implicitly recognises, is that because it is transparent, the market can see every trade coming. This deters the big buyers and sellers who like to keep their deals obscured from view for as long as possible. What would make a real difference to Sets would be for the Exchange to allow blind trading and then act as a central counterparty - effectively guaranteeing trades and thus solving the credit risk problem of dealing with an unknown buyer or seller.
The Exchange has proposed just such a solution but only some time after 2000 and only then if its lengthy consultation procedures prove there is support for something which would be costly for member firms.
Until blind trading is introduced, many large institutions will stay with the old quote driven system, which is making indecent sums of money for the market makers who can scarcely believe their luck.
Seven months after the launch of Sets the Exchange has at last arrived at a diagnosis of what is ailing. Unfortunately its remedies do not go nearly far enough for the health of the London market.
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