Exchange faces fight on trading system

Share-dealing revolution: Fierce opposition from board members threatens plans for order-driven facility

The Stock Exchange executive will tomorrow try to push through plans for revolutionising share dealing in London against fierce opposition from some of its most powerful board members. "We are heading for a bust- up in the board on this issue," an insider said yesterday.

Michael Lawrence, chief executive of the Exchange, is keen to show the market, which has endured a tide of negative publicity recently, that he is on top of events. The executive wants an announcement to be made now to demonstrate that the Exchange will offer members a choice of two share-trading systems from next August.

Alongside the traditional London quote-driven system, whereby large market- making firms use their own capital to post continuous prices at which they will buy and sell shares in all the main UK companies, the Exchange is developing an electronic order-driven dealing facility.

Automatically and anonymously matching buy and sell orders, this system would be similar to that used in all other main international financial centres. Several of the big US investment banks, which are wielding increasing influence in the City, have been pushing for the rapid introduction of an order-driven system.

"London is an anachronism. Share-dealing here is among the most inefficient in the world. We need a change as soon as possible," said a chief market- maker from an American broking firm.

Some of the biggest British market-makers, which have traditionally been among the Exchange's most influential members, are fighting a fierce rearguard defence against the order-driven plans.

Firms such as SBC Warburg, NatWest Markets, BZW, Smith New Court (now Merrill Lynch), which all earn considerable amounts from market-making, are concerned that a dual dealing system is unsustainable, and that the introduction of order-driven trading will rapidly kill off London's hallmark dealing tradition.

All these big firms, which each employ some 50 to 60 market-makers, concede that there would be significant job cuts among some of the City's highest- paid traders should the order-driven system prevail.

The atmosphere within the board has become strained, with powerful market- makers arguing that the Exchange is pushing too hard to ensure its own success. Proposals by Mr Lawrence to take the Exchange into new commercial areas which will compete with some of its own members, such as inter-dealer brokers, have provoked outrage.

The Exchange has now said it would not seek new income sources to replace the loss next year of the pounds 60m annual revenues from Talisman, when it is replaced by the new electronic Crest settlement system. The Exchange expects to sack 300 of its 1,300 staff.

The Exchange has been working on its order-driven facility for three years. Recognised as state-of-the-art, the technology would be introduced next August as part of the final phase of the "Sequence" modernisation programme. The final go-ahead for the order-driven system need only be taken next year, but the Exchange executive is pressing for a formal decision soon to end uncertainty over its role.