The week ahead: Why market makers have lived to deal another day

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The Independent Online
ONLY a few years ago jobbers - or market-makers as they are known in these days of electronic trading - were regarded as an endangered species.

The arrival of order-driven trading (Sets) would, it was felt, leave them scavenging for the discarded trading crumbs. Yet one leading stockbroker is now bidding to become a significant market-maker; three smaller firms are in various stages of launching their own market-making operations and a venture capitalist is planning a summertime debut. Others are thought to be planning a share wholesaling presence.

The simple fact that order driven trading has not been an outstanding success is only partly responsible for the sudden popularity of market- making.

Sets has suffered from rogue trades which have distorted prices to such an extent that even closing Footsie calculations have clearly been inaccurate. The feeling that Sets can be manipulated has created considerable caution and, after more than six months existence, the order book is thought to account for less than 40 per cent of the trades in the Footsie and supporting stocks it covers.

Market-makers, operating off the order book, have been reaping rich rewards. They have been able to trade without the transparency they were subjected to under the old, screen-based trading system.

But, of course, much of the stock market is not in the range of the order book and, unless there are widespread improvements, it is unlikely to be.

Panmure Gordon is the firm pushing for a much bigger market-making presence. It has recruited 14 market-makers from UBS and is covering around 85 per cent of the main market.

The new venture, it is felt, provides an extra service for clients and makes PG a much more rounded investment operation.

Apax Partners, which has made a strong impact on the corporate scene, is the ambitious venture capitalist. Like the three stockbrokers, Durlacher, Raphael Zorn Hemsley and Williams de Broe, it is not planning an assault on the big players. The neglected small company sector is the target.

Although shares on the market's under card have staged a significant improvement in the past few months they did, for a long while, limp a long way behind Footsie stocks, producing a two-tier market of high-performing blue chips and down-in-the-dumps also-rans.

One of the reasons advanced for this sad state of affairs was the difficulty often experienced in dealing in the shares of small companies. The lack of liquidity was said to frighten off institutions, worried they could find themselves lumbered with stock they could not unload.

The shortage of liquidity also produced wide dealing spreads, a deterrent not only for institutions but for many private investors whose love of small companies is a big, but unappreciated, influence in allowing the market to function.

It is likely that the arrival of more market-makers on the small company pitch will narrow the value gap which has developed.

As Geoffrey Chamberlain of Durlacher points out, a trade in 10,000 shares in an out-of-the-way company can have a dramatic influence on a share price, upsetting the company and often the investor.

Apax regards market-making as a "natural extension" of its corporate finance activities; Durlacher intends to operate in media and technology stocks, its specialist areas, although house shares may also feature.

RZH is another looking at an area its knows best - general insurances such as the Lloyd's insurance companies which have arrived in recent years.

Williams is spreading its net to cover around 120 small companies. It enjoys a strong small companies presence through its corporate side and research. Malcolm Graham-Wood of Williams believes the move should help the companies involved and the firm's investment clients.

Winterflood Securities, which at one time seemed the only market-maker prepared to deal in small companies - it trades in 1,500 - is unruffled by the increased competition. Said Winterflood's Ian Throssell: "Competition is never a bad thing; if the newcomers stimulate interest in small companies, then great."

This week's profits programme includes a clutch of blue chips, ranging from beer to oil; from generators to superstores.

The oil slick comes from British Petroleum and Shell, each offering first- quarter results. The continuing crude price weakness will take its toll and it is unlikely the two giants will offer the market much encouragement.

Whitbread provides the brewing contribution, although beer now represents only 10 per cent of profits as the group has increased its retailing muscle with its restaurant expansion.

Merrill Lynch estimates year's profits will emerge at pounds 358.2m, a pounds 55.4m advance. J Sainsbury is expected to offer year's profits around pounds 720m, a sharp increase on last time but still below the level touched a few years ago.

ScottishPower kicks off the utilities reporting season and profits of around pounds 640m against pounds 558.4m are thought likely. Still, it is its overseas ambitions which are expected to create more interest than its sharp profits advance.

The group last month pulled out of talks to buy a US electricity group. If it had gone ahead it would have enjoyed the distinction of being the first of the privatised utilities to buy an American power group, thus reversing what seems to have become a monotonous one-way journey. It is known to still nurse international ambitions and there are hopes it will spell out its plans.

Others due to report this week include Tate & Lyle; BSkyB and Hillsdown Holdings.

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