Tradepoint learns from the lessons of Taurus: The Stock Exchange's role is vulnerable, writes John Willcock

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The Independent Online
TAURUS is dead, the London Stock Exchange is in disarray and rivals scent blood. The theory goes that if the exchange cannot come up with a computerised share settlement system, perhaps its role in share trading is also vulnerable to competition.

Certainly the exchange's hold over share trading is a monopoly for the taking. Only a tiny amount of business in listed British shares takes place outside the market's grip. It is a state of affairs that has already caught the eye of the Office of Fair Trading, which is now taking a look at exchange rules that forbid member firms from quoting better prices on a rival system.

Competition threatens from a number of quarters. There is nothing to stop big British and international companies being quoted on rival exchanges in Frankfurt, Paris, the US and Japan. Many already are. Once this happens, institutions can deal where they want, choosing their market according to costs incurred by broker commissions, exchange fees, taxes and - shades of Taurus - speed of settlement.

Closer to home, a number of former exchange executives have joined together to form a company, Tradepoint, which aims to launch a rival computerised share trading system in London this time next year.

Tradepoint, perhaps with the benefit of hindsight, claims to have learnt a number of lessons from the Taurus debacle. Instead of employing hundreds of specialists to develop complex systems from scratch, it is using tried and tested hardware and keeping its software development simple.

This saves huge amounts of time and money. While the Taurus programme started in 1989 and cost the City anything up to pounds 400m, Tradepoint is using the Vancouver Computer Trading system (VCT), which was developed for a fraction of the cost three years ago and has operated successfully in Canada since then.

Of course, the value of the comparison with Taurus is limited. Taurus never happened, while the exchange's own system, Seaq, has been in operation for six years. Seaq works - it has had its crashes and bad days since being introduced at Big Bang, but it has proved fairly robust, if not the fastest system in the world. Under Seaq, market-makers display their firm prices on screens, but brokers still have to pick up the phone to execute their deals.

Tradepoint is not aiming to take on Seaq wholesale. It wants to satisfy one part of the market, namely the big institutional fund managers who want to trade large chunks of securities cheaply and easily.

Peter Bennett, Tradepoint's chief executive, says he can provide a better and cheaper service than Seaq by allowing institutional traders directly into its automated system. Each user makes a commitment on screen to trade in a particular stock at a particular size and price. The anonymity of those trading is maintained, which should aid institutions dealing in big chunks of stock that threaten to move the market. At a glance members of the market can see all the trades going on, the spread between buying and selling prices and the depth of the market.

This system is similar to that offered by the existing Inter Dealer Brokers (IDBs) in London who allow market-makers to trade between themselves with a narrower spread between the buying and selling price, forming a 'market within a market' that excludes the end-buyers, the institutions.

This understandably annoys them, for they feel that they are not getting as keen a deal as they could. Mr Bennett insists Tradepoint will be 'opening this out a bit.'

The newcomer will break even if it gets 1.5 per cent of the turnover by value of institutional share trades in London. 'If we get to 10 per cent in five years' time then we will be a very viable company,' Mr Bennett says.

Interestingly, he anticipates room for plenty of competition. Other share trading systems up and running in the US include Posit, run by Jeffries & Co, which forms the Arizona Stock Exchange, Autex run by Thompson Financial Networks, and Instinet, owned by Reuters, which has made a strong impact in the US and has a subsidiary in the UK.

Instinet gibes at the description of a rival to the London Stock Exchange, pointing out that it is merely an automated portfolio trading system that operates within the exchange's existing systems. But the combination of niche marketing - it aims mainly at big US fund managers investing in Europe - and advanced yet proven technology - puts Instinet nearer Tradepoint than the exchange.

There is no consensus, however, that introducing new trading systems to rival Seaq is a good idea for the future of London as a share trading centre. Many market-makers and institutions are worried that any fragmentation of the dealing system could damage liquidity, which could harm the City's ability to fight off competition from Frankfurt, Paris and elsewhere.

The fear is that with three or four different trading systems, big chunks of ICI shares, say, would become difficult to shift. Fans of the new systems argue that they are needed precisely to make big share trades cheaper and more efficient, but the liquidity argument still holds sway in the City.

How long this remains so is open to question. The credibility of the London Stock Exchange has been so severely dented by the Taurus fiasco that one clearing bank declared recently that it would not invest another penny in any technical project supervised by the exchange. With hundreds of millions of pounds already earmarked for improving the market's existing trading system, this loss of faith could be a serious problem.

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