SIB to rein in market-makers

Big Bang revisited: Competition will transform share dealing
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The City's lead regulator yesterday launched the biggest shake- up in financial services since Big Bang. Unveiling its wide-ranging Equity Market Review, the Securities and Investments Board heralded further inroads into the dominance of the Stock Exchange and reductions in the privileges of its most powerful members, the market-makers.

In recommendations designed to complete the unfinished business on Big Bang of the mid-1980s, the SIB has broadly sided with criticisms from the Office of Fair Trading that some of the Stock Exchange's rules distort competition and that market-makers, the firms that drive the dealing system by continuously quoting prices for buying and selling large blocs of shares, receive excessive privileges.

The SIB said securities markets worldwide were undergoing "a period of unprecedented change", notably in the diversity of instruments and markets and the explosive growth of huge conglomerate investment houses. It sets out to introduce regulatory changes for the City on the threshold of the 21st century.

"If we have got this right, we will be able at last to put behind us the endless debates and skirmishes which have surrounded the regulation of the UK equity market since Big Bang more than eight years ago," said Andrew Large, head of the SIB. "This is the framework to over-arch the new fragmented markets. If we achieve that, London will thrive into the future; if not, it will suffer."

Acknowledging the importance of the Stock Exchange, and the British securities trading tradition built up around market-makers, the SIB report marks a significant shift by underlining the need for rival trading systems.

The report reflects the changing face of the City, and the increasing role of US and continental firms, used to the automated order-driven dealing system where trades are matched electronically and anonymously.

The SIB has just sanctioned the start of the first rival, order-driven exchange, Tradepoint, which begins operations in August.

"SIB regards it as healthy- and inevitable that a dynamic marketplace should develop a variety of different trading instruments and trading methods to provide for investor needs," the report stated.

The SIB rejected the Stock Exchange's vigorous defence of its quasi- monopoly position, saying it attached great weight to "market forces determining how trading should be conducted, and to market users being afforded the scope to realise the potential benefits of competition."

The SIB supports the OFT's calls for "enhanced transparency" - significant reductions in the privileges allowing market-makers to hide their trades from the rest of the market. However, it rejected "full transparency" because market-makers would be unwilling to commit large amounts of capital to big trades without some cover for the risks.

The Stock Exchange, in pre-emptive negotiations with the SIB, agreed in April to shorten significantly the delay allowed market-makers in publishing their trades.

In addition to this concession, the SIB requires that from 1 January 1996, 75 per cent of trades in liquid stocks by volume be published immediately. In January 1995, the proportion was 49 per cent. "Over the longer term, the SIB expects to see further quantitative and qualitative improvements in post-trade publication on the Exchange," the report stated.

In addition to speeding up the publication of trades, the SIB wants to see market-makers' exclusive privileges on borrowing stocks widened to other participants, and the removal of the rules preventing better trading prices being quoted on a rival exchange to the Stock Exchange. The SIB said: "The overall balance of privileges and obligations needs to be monitored to ensure that investors can be confident that market-makers are not given unfair competititve advantage."

The SIB also reacted to the controversy over Swiss Bank Corporation's use of derivatives to get round disclosure under the Companies' Act during Trafalgar House's bid for Northern Electric. The SIB called for regulators to introduce arrangements for disclosure of economic interests of 3 per cent or more in a company, including the use of derivatives.