The Stock Exchange is to suffer another body blow this week when Salomon Brothers, a leading US investment bank, announces it is abandoning London for trading European equities.
Similar decisions are also said to be imminent from several other big international houses, including Lehman Brothers, providing final confirmation that the challenge by Seaq International, the Exchange's trading facility, to the likes of Frankfurt Paris, and Milan is over.
"Seaq International is dead. This is the beginning of the exit stampede," said the head of market-making at a big London firm. The Exchange has already been stung by criticism that it has not kept up with market developments. Rudolph Mueller, chairman of UBS UK, recently accused the Exchange of failing to take the lead in forging co-operative arrangements with Continental exchanges.
"The London Exchange are the Luddites of the stock markets. Having dominated 10 years ago, they are now among the most inefficient, on a par with Greece and Poland, when it comes to price fixing and transacting business," said the head of equities at a leading international investment bank.
An important catalyst is the beginning of "remote trading" across the European Union. An investment bank authorised to trade in one member state will be able to apply for membership on other European exchanges without having a physical presence there. This was an important consideration behind NatWest Markets' decision late last month to delist from nearly all Continental share trading on Seaq International.
Investment bankers stressed that the eroded power of the Stock Exchange would have little effect on London as the pre-eminent European financial centre. "The truth is that London-based investment banks remain the centre of cross-border equity business, and the fact that they do not transact it on Seaq International in no way diminishes the importance of London," said a senior banker.
Seaq International was set up in the mid-Eighties, when inefficient European exchanges were unable to handle the flow of cross-border investment. London rapidly became the centre for trading European shares, but the Continental bourses fought back with modernisation. While London stuck to its quote-driven system, dominated by the powerful market-making firms, the European exchanges updated with automated, order-driven trading systems, preferred by most international investment banks. "The LSE should have moved to an order-driven system in the late Eighties. Instead, it was cowed by its City establishment members and has lost out," said a head of equities trading.
"The London exchange used to argue that the success of Seaq International proved the superiority of quote-driven trading. Its passing away may be a precursor of changes to the way domestic equity is traded," noted a chief market maker.
The fact that three bastions of the old British market-making establishment have been taken over by foreign firms is shifting the balance in the trading system debate. SBC Warburg has ceased trading German equities in London. Both Merrill Lynch, owner of Smith New Court, and Kleinwort Benson, bought by Dresdner Bank, are urgently reviewing their options. "As far as European stocks go, Seaq International is no more than an advertising bulletin. Its role is now in emerging markets, helping trade Turkish, Indian stocks and the like," said a head of market making.Reuse content