The clubbiness of the City meets high-tech. Decorous hurly-burly on London Stock Exchange yielding to computers
IT was once a bastion of conservatism, a gentleman's club where everyone wore top hats and membership depended on the right connections in the British establishment. It was a place where business had always been transacted by word of mouth, where unwritten rules of conduct prevailed, and discretion bordering on secrecy was the norm. But now, the London Stock Exchange is on the brink of a dramatic revolution that will bring this venerable, tradition-bound institution into the age of modern technology -- and help London reassert its position as one of the world's main financial centers.Skip to next paragraph
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To meet the challenges posed by increasingly powerful American and Japanese financial institutions and the growing use of sophisticated computers in international markets, the stock exchange is gearing up to go high-tech.
A new, automated, screen-based electronic dealing system is to be introduced by the end of next year. The system will eventually eliminate the need to trade on the floor of the exchange and accelerate the pace of doing brokerage business.
``We won't have the stock exchange floor; we've lost our top hats; we've lost everything,'' says Brian Winterflood, managing director of Bisgood Bishop & Co., a jobbing (marketmaking) firm. ``It's all been very nice, very cushy, with long lunches. It has been a marvelous way of life for everyone. But in the new world you daren't not look at the screen.'' Enter the computer age
The new system is designed to enable the stock exchange to overhaul its dealing and membership structure. In 1983, the government threatened to sue the exchange unless it changed its restrictive and monopolistic practices. The exchange said it would comply.
The exchange agreed to abandon fixed commissions and open its membership. With the proposed removal of minimum commissions in 1986, the exchange decided to merge the functions of stockbroking with stock jobbing. To handle the new combined broker-dealer structure, a new dealing mechanism had to be devised.
The process of developing that mechanism has not been an easy one, however -- and the exchange is now facing a challenge from Reuters. The British information service has announced plans to establish its own electronic stock market trading service in July, which could eventually compete with the new system being considered by the exchange.
Reuters will use the system created by the New York-based Institutional Network Corporation (Instanet), which has already developed an automatic dealing system in the United States. In the initial Reuters service, Instanet will provide information on US equities and American depositary receipts (ADRs), dollar-denominated certificates issued by banks to facilitate trading in foreign stocks. Although stock exchange rules prohibit members from dealing in British stocks outside the exchange, Instanet will enable them to deal in ADRs of British companies.
There is some pressure within the stock exchange to take advantage of the system as part of the exchange's overall automation. Talks between officials from the exchange, Reuters, and Instanet are under way in an effort to reach an agreement.
Whatever the outcome, the Reuters challenge only underscores the importance of moving into the computer era for the 184-year-old exchange. London's time-zone edge
In the age of high technology, competing marketmakers ``can't operate satisfactorily on the trading floor -- they need to communicate with their clients,'' notes George Hayter, divisional director of information services at the stock exchange and the architect of the new system. ``To compete effectively, there was no alternative but to have computers.''
David Bailey, an equity sales partner at the Phillips & Drew brokerage, adds, ``The system needed to be updated, and computers were the only way forward to become more visible. Without computers the process would be very painful.''
In addition to making the market more ``visible,'' having a screen-based system will enable broker-dealers to take greater advantage of London's place in the world's time zones. But not being tied to a trading floor, Mr. Hayter says, an early broker-dealer will be able to operate in the closing stages of the Far Eastern markets and still catch New York in the late afternoon, giving London the potential to be a 24-hour international financial center.
To put its systems into practice, the exchange is using as its model the 15-year-old National Association of Securities Dealers' Automated Quotation System (NASDAQ), the over-the-counter market in the US. Hundreds of dealers are linked electronically in one system that supplies instantaneous wholesale price quotations from dealers who make markets in OTC stocks.