ALEX BRUMMER COMMENT: Rolet rolls out the changes

By ALEX BRUMMER, CITY EDITOR
Updated:

The threat to the City from the financial meltdown, Alistair Darling's tax raid on upper-income taxpayers and European regulators is extraordinarily serious.

It makes it all the more critical that London is seen to have world-class financial infrastructure.

A core element of maintaining the City's edge is modernising the London Stock Exchange. The last chief executive, Clara Furse, spent most of her era defending the LSE from a range of marauders which came from every corner of the earth, including Australia, the US and Scandinavia. 

Amid the constant brawling, an overhaul of the LSE's trading platform took a back seat.

Her successor, 49-year-old former Lehman banker Xavier Rolet, is seeking to change that. His style is very different. He has shifted himself from the seventh-floor suite of offices on Paternoster Square, overlooking St Paul's, to lowlier quarters among the troops and already has taken the first blow against what he clearly regards as a bloated staff.


Clara Furse, former CEO of the LSE

Ex-LSE chief executive Clara Furse

But the real task is changing the trading platform, the heart of any exchange. It will not be easy. At least two of his predecessors as chief executive were defeated and forced out over systems. Rolet reckons that the LSE has the wrong model.

Whereas the best exchanges create their own software and farm out much of the hardware, the LSE has it the other way round.

This means it is unable to add and subtract from its platform as quickly as its rivals.

The situation has become particularly acute because of the proliferation of competitors, ranging from Turquoise to Plus markets.

Rolet has been looking with envy at the flexible freestanding BATS platform used by banks and brokers-across the world. He is also known to admire Nasdaq's INET.

Putting a new system in place is, in his view, the key to taking on rivals. It should drive down the cost of trading, improve speed and restore the market-making capacity  -  the role carried out by the old jobbers  -  before the LSE switched to order-driven.

This, for instance, would enable the LSE to provide a better market in some of the less liquid stocks, including those on AIM, and might revitalise what has become a moribund operation.

Furse failed to win much credit for the merger with Borsa Italiana, which was viewed in certain quarters with disdain as a poor second after Euronext fell to the New York Stock Exchange.

What, however, was not recognised was that the Italian bourse has one of the best fixed income platforms in the world.

This has become very valuable at a time when record levels of government and corporate debt are being issued to deal with the fallout from the credit crunch.

It also owns MOT, the world's largest market in retail corporate bonds, something which is largely inaccessible to ordinary investors in Britain. Rolet believes that London could well establish itself as the global leader in this area.

Anything involving technology can go wrong and Rolet must be aware of the pitfalls. It is likely that financial results will look less that stellar as the investment in new systems and the costs associated with the old are written off.

But if he succeeds in keeping the LSE strong and independent in the face of threatening competition, the short-term hit to the profit and loss and possibly the share price, will prove worth it. 


Foul Play

You could almost have written the script. Sir David Walker, a banking insider if there ever was one, writes a robust dossier designed to restore order to the financial system and the bankers scream foul.

The great cry of Sarbanes-Oxley, the post-Enron regulation in the US said to have led to a migration of finance to London, goes up.

We know bankers have the ear of the Prime Minister. You only have to look at the Chequers guest list to see that. Indeed, another banker, Stephen Green of HSBC, heads the government's Business Council.

But the bankers should not be allowed to get away with the Sarbanes comparison. That was, after all, legislation and what Walker is proposing may not follow that route.

More importantly, the financial sector has had its way for too long. Much of the trade which migrated to the UK after American regulators tightened up was not worth a candle.

The bankers do not get the message. It was their incentive arrangements which brought disaster on the Square Mile. Stronger boards are essential. As for pay, there may be a case for going beyond Walker. If full payouts of bonuses were held for seven years then the system could be sure of capturing most of the ups and downs of an economic cycle. 

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