Stock Exchange gives go-ahead to trading reforms

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The Independent Online
The Stock Exchange emerged yesterday from months of bitter controversy to give the green light to a potentially radical reform of the way shares are traded in London. A fully automated order-matching system for the FT-SE 100 stocks is to replace the tradition of market-makers quoting buy and sell orders, bringing the City into line with all international financial centres.

But the compromise blessed by the Stock Exchange's board bore the marks of the lengthy struggle by the powerful market makers and some of Britain's biggest institutional investors against the rushed change initially sought by the Exchange executive.

The board said it now expects spring 1997 to be the earliest date for the introduction of the new trading services. By limiting the future order book to the FT-SE 100, and most likely by restricting the size of potential orders, the compromise reform will also allow the big market-makers to carry on their dominant business in London pretty much as before.

A statement by the board said the order book "will be combined with block trading, maintaining the ability of large players in the London market to continue to take risks and commit capital."

The row over the nature and pace of the trading reforms was one of the main reasons behind the dramatic sacking at the beginning of this year of Michael Lawrence, the chief executive of the Stock Exchange. He subsequently accused a small group of market makers on the board, principally Donald Brydon of BZW and Michael Marks of Merrill Lynch (formally Smith New Court) of mounting a coup against him to head off reforms they feared would damage their livelihoods. Mr Brydon and Mr Marks have denied the accusations.

The recommendation for a public limit order book accepted yesterday was put forward unanimously by a special Stock Exchange steering committee comprising a majority of market-makers. "There has been something of a change of heart," said one.

"There has been a recognition that we have got to make this system work." Giles Vardey, director of market development at the Exchange said: "It was a good meeting, there is a good consensus."

But the recent consultation on the proposed reforms by the Exchange showed an overwhelming desire for more time, and considerable concerns among big institutions about preserving liquidity.

"We are talking about a vast number of issues, IT, regulation, rules. We are all in favour, but what practitioners are saying is that this is highly complicated and we need more time to finalise the proposal," said a board member.

Putting off the introduction until the spring at the earliest met strong pleas from IT departments that they want to get the adaptation to the Crest electronic settlement system out of the way before starting on another large innovation. The final stage of the Exchange's modernisation of its trading platform, Sequence Six, will go ahead as planned on 27 August, but its new trading service capability will not be activated until much later.