London Stock Exchange Scrambles to Modernize

ALREADY weakened by past failures, the London Stock Exchange has begun 1996 with a crisis of serious dimensions.

A revolt by the heads of some of Europe's largest investment banks forced the sacking last Thursday of Michael Lawrence, chief executive of the world's third-largest stock exchange, after only two years in the job.

Mr. Lawrence was appointed to push through a sweeping modernization plan, designed to bolster the exchange's declining fortunes. But his forceful style - and some of the reforms - alienated powerful interests in the banking and investment world.

The stock exchange board gave Lawrence half an hour to clear his desk. John Kemp-Welch, the exchange chairman, has refused to give details of why the chief executive had to go, beyond saying that he had "lost the confidence of the exchange's 350 members."

Mr. Kemp-Welch insists that the policies with which Lawrence was identified will continue.

Whoever gets Lawrence's job will do so at a time when London's dominance over European bourses is being called into serious doubt. Since the "Big Bang" of 1986, which deregulated brokerage fees, London has appeared sluggish in its attempts to update its trading methods and to resist attempts by other European bourses to gain a larger slice of the market. Frankfurt and Paris were quick to see the virtues of electronic trading and to take advantage of modern technology.

Rudolf Mueller, chairman of UBS UK, said last year that London had "missed the boat" and handed the advantage to its continental rivals. Last September, the London stock exchange attempted to resist the setting up of a computerized Tradepoint Investment Exchange, but had to back down. Most of the opposition to Tradepoint, which is geared to the needs of smaller brokerage firms outside London, came from big trading houses in the British capital, which hold most of the seats on the board of the London exchange. Lawrence was perceived as a friend of the smaller traders.

Lawrence's departure comes less than three years after Peter Rawlins, his predecessor, was forced to resign over the collapse of Taurus, a planned paperless share-settlement scheme. The flop cost more than 300 million ($466 million).

The Bank of England had to be brought in to organize a replacement for Taurus. The new system, known as Crest, is due to begin operating in August, which means the exchange must have a new chief executive in place well ahead of that date.

"The board will be looking for someone who can sell ideas up front rather than trying to bulldoze them through," says Ron Bradley, head of executive recruitment at Jonathan Wren. "It won't be easy to find such a person."

The exchange clearly faces a critical period. The main reason for Lawrence's sacking was a clash between backers of the London exchange's traditional quote-driven trading system and reformers who want it to concentrate on an "order-matching system," says financial analyst Patricia Tehan. The older share-trading system, she says, depends on "powerful market-makers who post buy and sell prices for shares" ahead of actual transactions.

Order-matching, which Lawrence favored and is routine on the Frankfurt and Paris bourses, brings buyer and seller into direct contact via electronic equipment, without the need for middlemen. London's Financial Times reported on Saturday that in mid-December the heads of Kleinwort Benson, the investment bank owned by Germany's Dresdner Bank, and NatWest Markets, the investment banking arm of National Westminster Bank, led a revolt against Lawrence's management of the London exchange.

Analysts say Lawrence failed to consult exchange members about the reforms he was implementing. One apparent case in point: Last year he persuaded the board to approve a mix of quote-driven and order-matching share trading starting this August. That move sparked the revolt among market-makers. Melvyn Marckus, a financial analyst, says five leading market-makers, including BZW, UBS UK, and SBC Warburg, have been "staunch opponents of the introduction of order-matching trading facilities."