HEATED debate over the mechanics of dealing shares in Europe's biggest stock market is due to come to a head in the next few days when the London Stock Exchange is expected to unveil the results of its latest consultation exercise.
Launched with high hopes seven months ago, the exchange's electronic dealing system, SETS, has proved reliable at a time of turbulent market conditions.
Yet it has also been blamed for increasing volatility in individual stock prices and the indices derived from them, leaving the exchange with the task of defending the system's performance.
Bourses in Continental Europe are increasing their collaboration ahead of the introduction of the single European currency, leading to talk of the eventual creation of a single European stock market. The potential competitive threat to London is clear.
The results of the exchange's latest consultation exercise on SETS will give exchange executives a chance to plot a future for the system. The review is expected to be published by the end of the first week in June.
Introduced last October, SETS allows buy and sell orders in members of the FTSE-100 index to be automatically matched by a computer, replacing London's former system in which brokers quoted buy and sell prices on screen but agreed trades by phone.
The exchange has argued that volume on the system has already shown signs of improving. It has also pointed to a narrowing of ''spreads'' between best buy and sell prices, suggesting dealing is getting cheaper.
Yet criticism of the system has continued. SETS faced a credibility problem from the start. Many investors and brokers liked the old system because it offered a guarantee of being able to deal quickly in large quantities of stock, through brokers who were committed to risking their own capital by holding large blocks of stock on their own books.
Many investment institutions have preferred to continue to deal in size through the dealers they know best, while sniping at the new system's performance. Institutional disquiet at SETS was highlighted in a survey for Reuters last month, which found that a majority of dealers at large fund management houses believed SETS offered poorer liquidity and slower dealing.
Although SETS handles around one-third of the trading volume in London, there is a risk that it may remain at that level - effectively a side-show while the real institutional deals are negotiated in the old style.
At the same time, SETS has irritated many in the market because of the frequently erratic share prices that it throws up. A specific complaint is of poor liquidity early and late in the day, leading to some calls for London's trading day to be shortened.
The exchange has decreed that only deals executed through SETS, whatever their size, are the ''official'' price of a stock. Thus, a small late trade in a heavyweight stock can have some distorting effects throughout the market as a whole.
It is no surprise then that the London financial community views SETS with mixed feelings, though there is anecdotal evidence of similar problems with systems in Continental Europe.
Some say the solution is for British investment institutions to adapt to the new environment.
''Big institutions take a decision over a period of days or hours and then they want it executed immediately,'' said a dealer at one brokerage. ''They haven't thought about their investment process properly.''
Yet the exchange may not feel able to wait for such an adjustment.
In its reaction to the consultation paper, it could shape the future of the London stock
market. - Reuters.
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