Gloomy anniversary of 1987 market crash

The Week Ahead

Derek Pain
Monday 19 October 1998 00:02 BST

TWO ANNIVERSARIES occur this week. One will undoubtedly bring back nightmarish memories; the other will have a more relaxed but not unanimously joyful reception.

Eleven years ago today a horrified stock market witnessed the start of what at the time seemed a crash of 1929 proportions.

The other birthday involves order driven trading; remember "Brown Monday" when the Chancellor switched on the controversial computerised order book, also known as the Stock Exchange Electronic Trading System (SETS), as the stock market collapsed in a sea of red?

Nowadays, the 1987 crash, when shares slumped 32.6 per cent, is seen in an almost benevolent light - after all within two years Footsie was riding at a new peak.

The current turmoil, which at one time took Footsie down more than 23 per cent has, by some of the more gloomy jeremiahs, also been likened to the disaster of 1929.

Despite last week's relative firmness the stock market remains jittery - perhaps in nervous convalescence. Although there is justification for believing the worst may be over, it would be unwise to expect an early return to the summertime romp when Footsie peaked at 6,179 points.

At the time Chancellor Gordon Brown opened the order book, the index was 5,211. The chill winds of the Asian crisis had just started to whistle and equities looked vulnerable. A few days later the market endured its worst ever set back, crashing 457.9 before ending the day off a rather less alarming 85.3.

The order book has been blamed for many things and may have contributed to the Asian setback, which continued to weigh heavily until the charge to the summertime peak.

With order-driven trading now one year old, the Stock Exchange is offering a vigorous defence, dismissing accusations of rogue trades and endeavouring to prove there is nothing wrong with the system, but perhaps something wrong with the people using it.

Most rogue deals, it believes, are the tails of multi-million-pound programme trades. In these trades completing a round of buys or sells is more important than worrying about the prices paid over the last dregs of such an exercise. Derivatives-related basket trades, arbitrage and hedging are the sort of activities seen as responsible for maverick trades.

And the Stock Exchange has produced a new figure for use of order-driven trading. Until recently it has admitted an uncomfortably low 30 per cent of possible trades were on the book. Suddenly that percentage has mushroomed to 58 per cent.

How? By changing the basis of the calculation. It seems, somewhat belatedly, that the Stock Exchange has decided to allow for the fact that order-driven trades are registered once, but market-maker trades - with the buyer and seller often pumping the same deal into the system - are double booked.

The possibility of closing Footsie calculations being distorted by odd trades, be they tailenders or any other odd input, will end in December when the index switches to an average reading.

Small investors, seen to be at the mercy of the order book, have to look to their stockbroker, is the message from the Stock Exchange tower. They should refrain, when trading in one of the 130 order book shares, from dealing "at best". And even execution-only brokers, not allowed to offer advice, have been given dispensation to provide a coded message, on the lines the market is busy and it might be wiser to deal later if they feel the investor could be trapped into a wrongly priced deal.

Even so many market operators remain anxious and deeply suspicious about order- driven trading, still preferring to deal with a market maker. They also fret about the way biggish deals can be broken down into smaller trades and the fact that the market can easily discover who is behind an order.

Whatever the official view - and there is no doubt an impressive regulatory system has been created to cover the order book - the feeling persists that it is open to abuse.

For example, last week brokers were querying the fascination for punching in orders in 501 shares in the HSBC banking group. Such an odd number - is it yet another derivative trade, an attempt to influence the opening price or, as at least one broker wonders, a coded message? Twice last week the first HSBC trades were for 501 shares.

Quarterly figures are the main profit offerings this week. The information group Reuters, the subject of profit downgradings, should record modest progress but the market remains worried that pressure on financial institutions will hit sales. As Nicola Stewart at BT Alex.Brown says: "Whether a major bank goes bust or not, all the group's customers will be scrutinising their costs; a cut back on Reuters feeds is likely to be a popular move for company management baying for immediate cost savings."

The group is also overshadowed by a US Grand Jury investigation into alleged misappropriation of information from its rival Bloomberg. Nine- month revenue should be around pounds 730m (pounds 713m).

SmithKline Beecham, still, much to its annoyance, seen as a target for drugs rival Glaxo Wellcome, could produce third-quarter profits of pounds 400m, up from pounds 376m.

Imperial Chemical Industries - its shares have been as low as 446p against a 1,244p high in the past year - has had a torrid time with forecasts cut and the breakdown last week of the sale of its US Crosfield operation.

Third-quarter figures could be pounds 90m against pounds 132m. Forecasts for the year range to below pounds 300m - Collins Stewart is on pounds 296m - with the consensus around pounds 380m. It made pounds 518m last year.

Wolseley, the building materials group, will produce year's profits, probably in the pounds 270m region compared with pounds 264.2m last time. Probably the market will be more concerned with the group's comments on current trading, particularly in the US, than the plain figures.

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