Revolution in share dealing to hit City
Friday 01 December 1995
The Stock Exchange yesterday announced a revolution in share dealing that could result in heavy job losses among the City's highest paid traders. The controversial decision to go ahead with order-driven dealing before the end of next year heralds another Big Bang, threatening the demise of the old jobbing tradition in Europe's financial capital.
But the powerful market-making firms that see their livelihoods at stake are mounting a fierce rearguard defence, and yesterday's stormy Stock Exchange board meeting failed to resolve the crucial issue of whether the new facility will compete head-on for the same top FT-SE stocks with the traditional quote-driven system. Heated arguments raged between board members, with some privately threatening to resign from the Exchange.
The precise shape of the new hybrid dealing system is to be sorted out in consultation over the next three months, during which the influential market-making firms are expected to argue vigorously for the maintenance of their lucrative privileges. But Michael Lawrence, the Exchange's chief executive, warned yesterday that London could not stand still. Competing trading systems already exist for the same stocks, both in London and the Continent, and the Exchange risks losing business if it does not offer choice, he said.
"The Board has taken a significant decision. It has agreed that the introduction of an order-driven system is not an if, but a how. This is what the consultation process must sort out," he said. The board, and the market generally, is deeply divided, between market-making firms such as BZW, NatWest, SBC Warburg, UBS and Merrill Lynch (Smith New Court), and the mainly continental and US firms that are used to order-driven dealing. The Exchange's institutional customers are leaning towards the order-driven option in the belief that it will reduce dealing costs by cutting out the expensive market-making middlemen.
Under the quote-driven system, which is the hallmark of City share trading, market-making firms use their capital to offer continuous, firm prices at which equities can be bought and sold. They make money from the difference between buy and sell prices, and their expert knowledge of the market.
An order-driven system cuts out these middlemen, automatically and anonymously matching buyer and seller, but it cannot guarantee that a deal can always be struck immediately. Market-makers argue that if they are forced to compete with order-driven facilities for the same stocks, their margins will be squeezed until they are driven out of business. Each of the big firms employs around 50 market-makers, who represent the City's highest- paid dealing elite.
Asked about the arguments in yesterday's board meeting over how the two dealing systems would co-exist, Mr Lawrence said: "We made no commitments to anybody. The only decision is that there will be order-driven dealing." But he conceded that the consultation could end up without order-matching for the top stocks. "Whatever the market prefers, that is what we shall give them," he said. The Stock Exchange's new Sequence technology, which is able to replicate every known trading system in the world, will go into operation on 27 August 1996.
Order-driven dealing will begin either on that date or within a few months. "We believe it is three years ahead of any known system in the world, and the power it will give London is global power," Mr Lawrence said.
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