The City comes unplugged: Taurus was to revolutionise share trading by replacing huge volumes of paper with an electronic system. But politics in the Square Mile doomed it to failure, writes John Willcock

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The Independent Online
The collapse of Taurus - like the pound's withdrawal from the ERM on Black Wednesday - came as a shock to the City of London, and the reverberations in the stock market will outlast the headlines.

Taurus was an opportunity for London to put itself so far ahead of other European financial centres that its primacy would be unassailable. It would have dragged Britain's antiquated system of owning shares into the 21st century. It would also have saved the City at least pounds 230m in share transaction costs over the next 10 years. All these chances have been embarrassingly - and expensively - fluffed. London's leadership in Europe suddenly looks vulnerable. Peter Rawlins has resigned as chief executive of the Stock Exchange, and the exchange itself may not survive for much longer.

One large UK bank, which had invested hundreds of staff and millions of pounds over the last few years in Taurus, typified the reaction on Friday: 'It's an absolute disgrace,' said a senior director. 'It's an example of a very bad management of technology. The technologists failed to deliver a system. It's a very serious blow for London. We're in danger of falling behind Paris and Frankfurt, just as they are about to make their pitches to be Europe's main money centre.'

Taurus was designed to replace paper with computerised systems, prompted by the huge increase in share certificate movements with the boom in share ownership over the 1980s.

For more than a century, two key documents have been needed to hold and transfer shares in the UK: a share certificate, issued by the company to each shareholder as legal proof of ownership, and a completed stock transfer form, delivered to the company so it can effect a transfer of shares.

The idea of replacing all this paper with computer automation was mooted in 1979, but complacency and disagreements had allowed the plan to drift until the shock of Big Bang and the privatisation boom.

In 1987, the paper-based system nearly collapsed, as the privatisations of state-owned industries churned out millions of share certificates and hordes of 'Sids' eagerly cashed in their gains.

Moreover, share buyers had up to three weeks to pay for their purchase. This increased the risk of default, because buyers might go bust before they paid or sellers might go bust before they delivered the shares. Some share deals are now worth hundreds of millions of pounds - enough to bust a bank if they go sour.

The answer was Taurus, which was to consist of three distinct phases. The first was to remove as much paper from the system as possible. Instead of share certificates, investors would get statements - like bank statements - regularly. This raised legal problems, however, as share certificates count as legal proof of ownership, whereas statements do not.

The second phase would have introduced rolling settlement, reducing the payment period from three weeks to three days. Other markets, such as the London gilts market where deals can reach pounds 1bn, already have rolling settlement. The money changes hands more quickly, and there is less risk.

The third and final phase would have made the transfer of money instantaneous with the transfer of ownership, a process dubbed 'delivery versus payment'. All this proved academic, however, because the Stock Exchange could not get past phase one.

The Stock Exchange said that the seeds of Taurus's failure were sown in 1989, when too many compromises were made between vested interests - compromises that eventually made the system far too complicated, expensive and time-consuming to build.

'Our mistake was to treat building Taurus as a technical problem. In fact, it was always a political and business problem,' said a Stock Exchange source. 'The other big mistake, however - strange as it sounds now - is that we were always obsessed with the idea that we had to introduce the system as quickly as possible. This meant that we never stood back and said 'what would be the most sensible way of building this system?' '

Two of the biggest clashes occurred between the institutional investors who wanted a fast, cheap service, and private investors, whose dealing costs would have shot up. There was also a stand-off between supporters of a single central share register and the existing registrars, dominated by the National Westminster, Lloyds and Barclays banks, which have roughly 90 per cent of the market. One remarked on Friday: 'Turkeys don't vote for Christmas.'

This excess of captains on the bridge, with no overall commander, led to Taurus suffering a series of changes of course. In 1988, the registrars and others torpedoed the plan for a central database to maintain all share records, and 'Taurus 1' went back to the drawing board as costs surged.

In August 1989, John Watson was brought in to head up the design team of the main software system. Mr Watson brought in a team from Coopers & Lybrand to help.

IBM was taken on to design a bespoke data communication system, while the Stock Exchange commissioned the American software house Vista to customise one of its off-the- shelf packages to provide a share management-and-transfer system.

Despite these delays, the Taurus team pressed on. In 1990, Mr Watson said it intended to start getting rid of share certificates in October 1991. It had first to link up with the participants in the network. An initial group of 12 companies, including Sears and BP, were expected to join. The launch was going to be deliberately low key. 'We can't afford to plunge in and fall on our faces,' said Mr Watson.

He added that most of the FT-SE 100 would have joined after the first year - enough to justify moving to the second stage of rolling settlement, which would have been completed by the end of 1993. Mr Watson said that the Stock Exchange would be spending between pounds 45m and pounds 50m on Taurus over four years. 'The timing on the whole project is fine,' he concluded.

Three years and several hundred million pounds later, the knives are out. Thousands of employees at stockbrokers and registrars have been trained to use the new system. Some smaller stockbrokers have based their entire computer systems on the assumption that Taurus will come in. They now face bankruptcy. At least two software houses are understood to be considering legal action against the Stock Exchange.

Leading bankers now anticipate the Stock Exchange simply withering away as other rival trading systems such as Tradepoint and Instinet start piling into the UK market and as the focus for new systems switches to the Bank of England. One clearing bank said it would not put a penny into any new project supervised by the Stock Exchange. With huge sums needed to be spent on modernising the Exchange's existing trading systems, such attitudes put a question mark over the survival of the institution.

While the Taurus disaster is a public relations blow to the City, it has also created a real risk that securities trading will drain away to financial centres elsewhere in Europe. Paris already has an automated settlements system. Frankfurt has one in an advanced state of development. New York, which has had an automated system for years, looks on in bemusement.

The Bank of England has taken over responsibility for finding a new automated system under the guidance of Pen Kent, one of its associate directors. What will he come up with?

The outraged banker again: 'It now looks as if we will end up with an off- the-shelf system, which is perhaps what we should have gone for in the first place. Whether it will be a two-tier system, a fast one for the institutions and a slow one for the private investors, I'm not so sure. But one thing is certain. We'll end up with a typical British sticky tape and string solution.'