Rules that give the middlemen a cutting edge
Sunday 10 July 1994
Investors who want to buy or sell shares, whether they be institutional investors such as pension funds, or private clients, generally use a stockbroker. The stockbroker will execute that order in-house if he or she has one client who wants to buy a share and another who wants to sell a similar amount of the share. But more often, he or she will look at the Seaq screen and see what prices the market-makers are quoting for that share.
Each share has its own page, and market-makers' prices are displayed there along with the maximum number of shares they are willing to buy or sell at that price. At the top of the page is a yellow strip known as the 'touch'. This displays the best quoted offer price - for purchase of shares - and the best bid price for sales.
The broker will then call a market-maker and agree a deal. If he wants to buy or sell a greater number of shares than the quantity on the screen, the prices there will only serve as a starting point for negotiations.
Market-makers' enjoy the following privileges:
Only market-makers can quote prices on the Stock Exchange Automated Quotations Service, the London Stock Exchange's screen-based market stall where shares and their prices are displayed.
Only market-makers have access to Inter-Dealer Brokers. IDBs deal between market-makers, allowing them to buy or sell stock anonymously.
Only market-makers can borrow stock through approved stock lenders. That allows them to cover shortages without driving up prices.
Market-makers are exempt from stamp duty.
They can delay public announcements of large trades. Normally, market-makers have to report trades to the London Stock Exchange within three minutes. The Exchange then relays this information to other market participants.
But a trade that is deemed to be more than three times the Normal Market Size (NMS) - a quantity that varies from one stock to another - need not be reported for 90 minutes. A trade that is more than 75 times NMS need not be reported for up to five working days.
This privilege gives market-makers time to unwind large holdings of shares before other market-makers find out about them.
Otherwise, prices might be driven down after a market-maker had been seen to have taken on a large position and the market-maker would be exposed to large losses.
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