Dealing competition will push up prices, says Stock Exchange

JOHN EISENHAMMER

Financial Editor

The advent of competing share dealing exchanges in London is likely to cause increased trading costs and regulatory uncertainty, the London Stock Exchange warned yesterday. Dealing firms will face a higher administrative burden as a result of the fragmentation of price formation in the markets with competing pools of liquidity, the exchange said.

The warnings came in a consultative document issued on changes to the Stock Exchange's rules made necessary by the impending breaking of its monopoly as rival electronic exchanges enter the market.

"The current rules are written on the basis that there is a single central market for trading UK equities," the document says, citing the need for urgent revisions. Tradepoint launches the first electronic order-driven dealing exchange, trading in the 400 leading UK stocks, on 21 September. Another computer-based market, Electronic Share Information, based in Cambridge, plans to launch its own screen-based order-driven system in small capitalisation UK stocks on 7 September.

Presenting the consultation paper, the Stock Exchange mounted a vigorous defence of what it sees to be the advantages inherent in the current central market system, pointing up pitfalls in the move to competition. Stressing the significant cost and regulatory implications of the revisions, it notes the trend incountries with a fragmented exchange system, such as Germany, to consolidate business into a single market.

"For the Stock Exchange to dig its head in the sand and say that it will be expensive for anyone but themselves to list their stocks is a foolish, hopeless cause," said Jack Lang, director of ESI

Specific proposals for key rule changes drew a positive response from Tradepoint, which saw a softening of the Stock Exchange's counter-attack on the forces demanding greater competition.

"In its proposed changes to rule 2.1, the Exchange has accepted it no longer has a monopoly over regulating share trading. This is a major advance," said Stephen Wilson, executive director of Tradepoint. He described the proposed options on rule 4.18, which up to now has prevented firms showing better dealing prices on rival exchanges, as "surprisingly positive".

The changes would lift the restrictions on firms inputting prices into other recognised exchange systems.

The proposed changes cover rules relating to exchange membership, off- market activity, price display and best execution, trade reporting, settlement, and conditions for inter-dealer brokers in the market-making system.