THE STOCK EXCHANGE

The muddle in the middle of the City

PETER WILSON-SMITH

The London Stock Exchange — or International Stock Exchange as it now styles itself — is in a mess. The central market which the ISE oversees is in danger of falling apart. Its members are divided and bickering amongst themselves. Many member firms are running up huge and unsustainable losses — at the end of last year they were running at an annual rate of about £500 million. And the role of the ISE itself is in doubt.

There is confusion in the City about what the ISE with its numerous commit- tees and 2,700 staff actually does at the moment. There is even more confusion and disagreement about what exactly its role should be in the years ahead. Should it be a trade association representing the interests of its members? Should it be a governing body for the stock market? Should it be an operator of complex and expensive electronic systems which may or may not be central to the role of running a stock market? Or should it carry out some

or all of these roles? .

It is a far cry from a few years ago when there were essentially two institutions which formed the hub of the City — the Bank of England and the Stock Exchange. Governance of the Square Mile revolved around these two. And while the Stock Exchange was sometimes perceived as weak, there was at least a broad consensus based on the mutual self-interest of its members.

That consensus has now broken down and the fate of the Stock Exchange's old trading floor in the tower in Threadneedle Street near the Bank of England is its epitaph. The once bustling arena where brokers jostled with jobbers, gossip was exchanged and deals done, is now deserted but for a few options traders and other dealers. A physical floor has been replaced by the abstract concept of a market based on electronic screens and with no natural geographical boundaries.

It is now clear that the huge upheavals preceding this transition, and culminating in the Big Bang of October 1986, have turned out not to be the end of change but a Pandora's box. The push for new systems has gathered its own momentum, leaving many bewildered about where it will lead to. The issues facing the ISE and its members are horrendously complex. Just one pointer to the problems of reaching agreement is the spread of membership; of the 360 ISE members, 140 are foreign- owned firms from various parts of the globe.

For Andrew Hugh Smith, who took over as chairman from Sir Nicholas Goodison last November, controlling this disparate group and welding it into a cohesive organisation is an immense task. Lead- ership and good management — two qual- ities which have been in short supply in the securities industry of late — will be crucial.

Mr Hugh Smith, a deputy chairman of ANZ McCaughan Merchant Bank, is not a high-profile figure in the City and the manner of his election, through the rather Byzantine procedures of the ruling council, immediately led to cries of foul. The old guard among the cardinals have pushed through their own man, it was claimed. Nor can Mr Hugh Smith being photo- graphed recently in a national newspaper down in the country with a twelve-bore under his arm, gun-dog at his feet, have helped much to promote a modern image for the ISE.

However, Mr Hugh Smith is certainly no fool. Nor is he shaping up to be the representative of the old guard. He is not a lifelong stockbroker who knows of nothing else, like so many of those who have traditionally dominated the London mar- ket. Called to the Bar in 1956, he practised on both the London and Midland circuits. He has also worked in industry, joining Courtaulds in 1960 where he worked until moving into the City in 1968.

'Hugh Smith is very good. He under- stands the issues. The problem is the ISE council and the bureaucracy. They just don't understand how easily the foreign competition could wash over them,' says one observer from the Bank of England, which is privately deeply concerned about what has been happening to the London market.

To understand the problems facing the ISE it is necessary to have a grasp of what it is now supposed to do, and how it relates to the Securities Association.

The two are sister organisations. The ISE — formed from a merger of the old London Stock Exchange with a completely different bunch of international securities firms which banded together as the Inter- national Securities Regulatory Organisa- tion — is a recognised exchange responsi- ble for regulating markets and setting the rules for companies having their shares listed. Much of its original regulatory role was shunted off to the Securities Associa- tion, which now looks after investor pro- tection and is responsible for seeing that securities firms are soundly run and have enough capital.

The two bodies share many administra- tive staff to keep costs down and there is an overlap on their governing councils. But if that is not complex enough, there are two other obstacles to co-ordination and con- sensus. One is that the Securities Associa- tion has a lot of members — such as estate agents and international securities firms — who are not members of the ISE. In addition there is a myriad of other more or less representative City bodies for banks, fund managers and the like, which have an interest in what is happening. 'The whole thing', according to the head of one of the big securities firms, Is a complete muddle.'

The chairman has also set in train a number of important reviews which have unleashed furious debate within the ISE. The workings of the equity market are being reviewed and a number of conten- tious changes being pushed through. These will sacrifice some of the transparency of the market but it is hoped will help to halt, and reverse, the fragmentation of the market as well as cutting firms' losses. A broad-based committee, including industry representatives, has been set up to handle the move towards electronic settlements — an area where the ISE procedures are hopelessly out of date. The ISE is a soft target for criticism at the moment and it is easy to forget its achievements. It is the world's biggest market for international shares and Lon- don has a reputation for being a safe place for investors to deal. The present upheav- als are healthy in the sense that they are forcing the ISE to focus on what it is there for: to allow companies to raise money and to provide a market for investors to buy and sell shares. The crucial role it must grasp is as the main international exchange in a European constellation of domestic markets. The danger is that if the present challenges are not met, the ISE will miss this opportunity and could eventually find itself breaking apart. Nobody wants to end up in the position of Shanghai in 1939, with 150 different stock exchanges.

Peter Wilson-Smith is financial editor of the Independent