Tradepoint gets lucky as it challenges the titans
Wednesday 14 June 1995
"Innovation always needs a bit of luck. To our immense relief, the lady came riding in on her charger at just the right moment," says Michael Waller-Bridge.
His brainchild, Tradepoint, is all systems go for its launch in August, after receiving authorisation from the Securities and Investment Board to pit the country's first fully-automated, order-driven share dealing exchange against the might of the Stock Exchange and the market-making establishment.
Mr Waller-Bridge, Tradepoint's chief executive, tries to play down the combative overtones - "we must not forget we are the new boys on the block" - but there is no mistaking the view among his institutional backers, including Framlington, TSB and Robeco, or the authorities overseeing the City, that the new exchange marks a turning point.
"Three years ago, when the idea of Tradepoint first did the rounds, people told us to forget it. Then the nods and winks got stronger," says Mr Waller- Bridge. Finally, as preparations for the electronic dealing system neared completion, Tradepoint found regulatory sympathy had shifted dramatically in its direction.
In March, the Office of Fair Trading produced a report highly critical of the special privileges of market-makers and of the restrictive practices of the Stock Exchange. It threw its weight behind calls for the encouragement of alternatives to the traditional British system of market-makers exclusively quoting share prices for trading on the Stock Exchange, saying it wanted to increase the potential for exchanges to compete, and for the market to determine the development of each system.
The SIB's Equity Market Review, to be published next week, is expected broadly to reflect the OFT's call. For Tradepoint, this shift in the regulatory climate is an enormous stroke of luck, for the strength of opposition to the venture from the Stock Exchange and bastions of market-making such as Smith New Court, the brokers, is considerable. But the Stock Exchange is also hedging its bets.
Sequence, its new technical platform from which the trading and information systems are run, also contains a facility for order-driven dealing. "That means we have 18 months to two years to establish our position," says Mr Waller-Bridge.
There will be no privileges for anyone on the electronic system, with dealing anonymous and immediate as buy and sell orders are automatically matched.
Tradepoint expects to start up in August with about 50 participants, dealing initially in the 400 most actively traded securities quoted on the London Exchange. In an effort to overcome the main criticism of order- driven systems, that they cannot guarantee continuous liquidity, pricing will be set to reward people who offer liquidity.
Anyone who shows an open order, either to buy or sell, will get net execution, while the person who comes in to match the order, the "aggressor", will pay the dealing costs. These are estimated to be close to the current rates of inter-dealer brokers or those charged for big institutional investors.
Tradepoint aims to maintain continuous matching of orders in the highly liquid FT-SE stocks, alongside a stacked auction system for smaller stocks.
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