INSIDE OUT

INSIDE OUT - The French have the best phrase to describe the tragi-comic goings-on at the London Stock Exchange: Grand Guignol. Somehow only the British stockbroking community could put on such an unedifying show of greed, disharmony and incompetence.

by ROBERT PESTON, editorial director of Quest (www.csquest. com)E-mail: rpeston@ collins-stewart.com.
Last Updated: 31 Aug 2010

The French have the best phrase to describe the tragi-comic goings-on at the London Stock Exchange: Grand Guignol. Somehow only the British stockbroking community could put on such an unedifying show of greed, disharmony and incompetence.

I suppose none of us should be surprised that this paradigm of pure capitalism is proving so inept at organising its affairs. Over the past two decades I have watched the Exchange botch almost every big strategic decision, from the development of settlement systems to the launch of trading platforms.

And it's no use laying the blame on its historic structure as a mutual.

Apart from the fact that it is now a public company able to recruit the best talent that money and share options can buy, few mutuals have been quite so hopeless. Many of the Exchange's best customers, from Standard Life to Norwich Union, got along very nicely for many years as mutuals.

And most of these have managed the transition to PLC status without becoming a laughing stock.

True, the Exchange's board got one thing right at the start of the year, when it decided that the status quo, with the LSE as an independent, national exchange, was unsustainable. Investors want to place their money in the best companies, wherever domiciled. They want their stock markets to offer the biggest choice of international stocks and shares, with the lowest transaction costs and the smallest risk of illiquidity.

To break free of its national boundaries, the LSE was able to mull two separate deals earlier this year. The merger with Nasdaq, the successful US market for growth stocks, had the quiet backing of the Treasury. Nasdaq had made a high-profile commitment - supported by the chancellor, Gordon Brown - to establish a European offshoot with headquarters in London.

But the US exchange lacked the funds and experience of European markets to set up Nasdaq Europe alone, and it had terrible difficulty finding a partner. The Stock Exchange was therefore in a strong position to dictate terms.

Unfortunately, its board, although attracted by the business logic of a Nasdaq link, thought negotiations would be interminable, due principally to the US market's convoluted ownership and decision-making structure.

And Nasdaq was more interested then in a European joint venture than a full-scale merger. But plenty of senior City and government figures believe it could have been coaxed into the big deal.

However, the Exchange's board was seduced by Werner Seifert, chief executive of Deutsche Borse in Frankfurt, into an unshakable conviction that there was a once-in-a-lifetime opportunity to crunch the London and German exchanges together. How he managed this is a mystery. But the fact is that the Exchange believed it had only a matter of weeks to construct and agree a deal with Deutsche Borse.

Indeed, the LSE's non-executive directors from London's bigger securities firms were so impressed by Seifert - a businessman of a calibre that the London market has found difficult to recruit - that it offered him the position of chief executive at iX, the entity to be formed by the Anglo-German merger, and sacrificed their own man, Gavin Casey.

There was only one snag.

The board is perceived by many Exchange members as representing the interests of a supposed cartel of the big US investment banks: Goldman Sachs, Morgan Stanley and Merrill Lynch. So they recoiled at the proposed merger terms.

Some of their concerns were legitimate: that the creation of twin hubs in London and Frankfurt would lead to highly complex regulatory and trading arrangements; and that business in the shares of small and medium-sized companies would be marginalised.

There may also have been a touch of chauvinism in the opposition to iX.

Many of those wary of the German exchange cheered when Sweden's OM made a hostile takeover offer. Your typical British Germanophobe regards Sweden as close to Aberdeen and Abba as a quintessentially British institution.

They also made a misjudgment in their conviction that Merrill, Morgan and Goldman are bothered much by what eventually happens to the LSE. In truth, these firms are so financially well-endowed that they could set up their own international exchange if they dislike whatever final shape the LSE takes. In an informal way, they have already mooted this possibility among themselves.

Trading platforms and marketplaces are far less difficult to create now, thanks to the internet and telecoms technology. For all the interest in the antics and horrors of this great spectacle, the question of what happens to the Stock Exchange is much less important to the prosperity of the City and the UK economy than it once was. If investors and traders want to be based in the UK - for a raft of regulatory and cultural advantages - they will create an efficient market to execute their business. But whether it happens to be called the London Stock Exchange is another matter.

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