Share revolution provokes deep City split

Stock Exchange members are still a long way from agreeing on how equity trading in London should change. Some still want no change, reports John Eisenhammer
The London Stock Exchange yesterday revealed for the first time details of the deep rifts between members in the 190 responses it received in the biggest consultation exercise in its 200-year history. At the centre of the controversy is the proposed revolution in the way shares are traded in the City.

Strong opposition to any change in trading methods has come from expected quarters, including some of the City's leading market makers such as BZW.

"Although the (consultation) document presents three options for change a fourth option, no change, is omitted and is the one which we would choose. BZW remains wholly supportive of, and committed to, the quote-based means of trading that continues to underpin the strength of London's equity market," it wrote.

An influential body of institutions, including such names as Commercial Union and Invesco, also expressed strong reservations about the need for abandoning the traditional London method of trading by market makers quoting firm buy and sell prices.

But a majority of responses, from both brokers and institutions, show varying degrees of support for an electronic system which automatically matches buy and sell orders. James Capel said "no change" was not an option. "The Exchange must move to a full public order book in all UK equities with block trading around it," it wrote.

Big institutions such as Mercury Asset Management, PDFM and Standard Life said the switch to an order-driven system would not harm liquidity. "We believe that an order matching system with block trading would give greater transparency and hence comfort to market participants," wrote Standard Life.

BP Investments wrote: "To attract overseas funds into the London market, I believe we need a fully order-driven, specialist system with block trading based on the New York Stock Exchange."

This support is reinforced by a further group which, despite its scepticism, accepts that change is inevitable because of regulatory and international pressures.

"While our strong preference is for the current structure of the Exchange's price-driven system to remain as present ... we assume that changes to the present system are inevitable," said Societe Generale Strauss Turnbull.

Even among supporters, the responses betray considerable concern at the lack of detail about costs. "The consultative document offers no details on the costs of the system to the users. Obviously, we would need to know what the fixed and volume-based costs of the service will be before we can fully assess the impact of the new service on our operations," wrote Albert E Sharp, which broadly supports change.

There is also a widespread wish for the introduction of what amounts to a radical switch in the City's dealing culture to be evolutionary rather than revolutionary. Most respondents said they will need more time, once the detailed rules are published, to make the technology changes, so a start-up is likely to be delayed well into next year.

APCIMS, the private client stockbroking association, urged the Exchange "not to rush into the implementation of a limit order book, and consequent market changes, when firms' attention is concentrated on Crest. Better by far to delay until 1997 when implementation will be more orderly."

In integrated houses, there was often a difference of views between the investment managers, worried about loss of immediacy in doing deals, and the broking side, more supportive of an order-driven reform. Fleming, Schroder and Kleinwort Benson offered split views. The Exchange is to put all the responses through a computer, coming up with a refined proposal to put before its board on 21 March.