View from City Road: In institutional broking, size is vital

Discount houses used to be the bit in O-level economics that no one quite understood: a general statement about 'specialised brokers used by the Bank of England to control money market rates' usually got you through.

However, the Bank has long since let it be known that the discount houses' traditional role will gradually be wound down. All four quoted houses have since been looking for new things to do, with mixed success. Yesterday one of the smallest, King & Shaxson, announced talks with privately owned Greig Middleton, a private- client stockbroker.

At first sight King & Shaxson's decision could be mistaken for the good old days of Big Bang, with firms hurrying around to snap each other up in order to form integrated securities houses. But its decision seems entirely sensible, especially with Greig Middleton on a historic price earnings ratio of around 8 to 9.

The other quoted discount houses have already diversified with varying success, including moves by Gerrard and Union into broking. Union did well in buying - and later selling - Winterflood Securities.

The worry is that Greig Middleton's growing institutional business, which now forms roughly a quarter of its turnover, is vulnerable to a downturn in general corporate activity. In institutional stockbroking, size is vital. If King & Shaxson is to make its mark, it should stick to the private side.