Shares: Sets continues to leave disorder on the book

Stock market week
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DISQUIET would appear to be growing over the order-driven trading system, aka Sets. When it was first thrust upon the City's investment community in October there was a general reluctance to discuss, on the record, its perceived failings. Many stockbrokers were happy to complain, but in deference to its newness and, no doubt, its relationship with the Stock Exchange powers, they were not prepared to stand up and be counted.

Anonymity is now being abandoned. After nearly five months of struggling with the order book and the Stock Exchange's failure to make any substantial changes, discontent is coming into the open.

Many of the complaints have been on behalf of small investors, with the order book seen as yet another example of what is regarded as the Stock Exchange's dismissive attitude towards private shareholders.

Seasoned professionals are also dismayed. They realise the Stock Exchange will never abandoned order-driven trading, if only because of its huge cost and the reputations which would be savaged. But they are anxious to keep Sets confined to its present portfolio - 100 Footsie stocks plus another 26 which are former Footsie constituents or the subject of futures contracts.

John Hall, managing director of stockbroker Brewin Dolphin, points out Sets was introduced "not with the private investor in mind but rather for the large institutional or international trader".

He says: "There is no doubt that the effect of the new system has been to increase price volatility, particularly when markets are thin."

Also, it has reduced the working day as prices cannot be relied upon at the beginning or end of trading sessions.

"As ever, our staff has adapted to the new system and make use of it whenever appropriate but, on balance, it is doubtful if it has brought any overall benefit to the private investor."

Fund manager Brian Banks, head of Guildhall Investment Management (part of Savoy Asset Management) says: "The system does not appear as efficient as the old market-making system, which was more competitive".

Market-makers, who were expected to be surplus to requirements once the order book appeared, are, in fact, enjoying a spectacular run.

Some 60 per cent of blue-chip trading is still conducted off the order book with market-makers reaping rich rewards, cherry picking the deals they are prepared to undertake.

Transparency is now a thing of the past. They can, in effect, deal in prices and sizes of their own choosing.

Concern about the order book is one reason why so much trade is still put through the old market-making system. Prices can be distorted. The so-called snake-in-the-grass trader can still input silly prices, hoping to catch some one on the hop.

At lunch time on Friday the order book for PowerGen, picked at random, offered a modest example of the distress Sets is causing. Although the quoted price was 792p, the last trade, which was off the order book, was 799p. Among the orders on the book was a buy at 750p and a sell at 890p. Under normal circumstances neither deal was achievable. Those responsible were hoping to score if something untoward happened.

Messrs Hall and Banks insist the Stock Exchange should not extend order- driven trading to the rest of the top 350 shares.

Says Mr Hall: "What is quite certain is that the system does not work well in low volumes and we are strongly against extending it beyond Footsie stocks as originally intended."

And Mr Banks believes it should be contained until it is "functioning properly to the benefit of all investors, big and small".

The Stock Exchange is currently consulting with the stock market about extending Sets and even reducing trading hours because of the system's slow start (it takes the first hour of trading to get it up and running) and the hesitant final 30 minutes when many trades are pulled off the order book, distorting closing prices and, therefore, the final Footsie calculation.

It is likely that Messrs Hall and Banks (and many other City men) will get their wish and the order books will not be extended.

External factors, such as the possible economic and monetary union (EMU) upheaval and the anticipated computer millennium problems, are likely to weigh so heavily that increasing the order book will be put off until the next century.

The introduction of Sets has not hindered the progress of blue chips which, despite last week's setbacks, are still hovering around levels which would be regarded as exotic at the start of the year.

Second and third liners, for so long left in the cold, have at last come alive.

Former stockbroker Robin Boyle, who runs Athelney, a small company investment trust, is astonished by the "lemming-like capacity among big investors" to chase blue chips. He says if just 5 per cent of the institution's pounds 65bn cash pile was pumped into smaller companies "we could move into a virtuous circle where rising prices attracted more money producing a further rise in market values".

There is a heavy round of company results this week. Norwich Union (pounds 640m against pounds 567m); BAT Industries pounds 2,58bn (pounds 2.4bn) and GKN pounds 410m (pounds 363.8m) are among the Footsie offerings.

And Rentokil Initial will again have the task of keeping up its 20 per cent growth promise. At the pre-tax level it should manage a 31 per cent gain to pounds 415m but it could slip up on the earnings per share calculation.