Defying augury

tauringhuang.

Sep 4th 2008
From The Economist print edition

Can the stock exchange and the City see off the competition?


AS THE British economy heads straight for the doldrums, the City is struggling too. Recent moves by the London Stock Exchange designed to see off encroaching rivals may cost the LSE custom rather than increase it. And even if the 300-year-old market can change its ways, the financial centre it buttresses may well be shaky. The signs are not good.

This week the LSE slashed its trading fees to match those of electronic trading platforms (known as MTFs), and said it would allow ultra-fast computerised traders to put their machines close to the LSE’s own computers. This will save the increasingly important program traders precious nanoseconds between sending an order and executing the trade. In July the stock exchange struck a deal with Lehman Brothers, an investment bank, to form Baikal, a so-called “dark pool” that allows high-volume trades to be executed bit-by-bit off-exchange and out of the public eye—that is, in competition with the LSE itself. The LSE still has a near-monopoly in listing stocks and providing price data, but increasing volumes are being traded on electronic platforms. Chi-X, launched last year, already has 15% of London’s share-trading volume. Other rivals are queuing up.

The LSE may be able to shrug off such virtual-market upstarts but it has yet to figure out how to expand its business as Europe’s flagship exchange. AIM, its market for international and domestic start-up companies, is shrinking for the first time. And the LSE’s merger last year with the Italian Stock Exchange has proved a disaster.

Its woes are symptomatic of waxing disenchantment with London as a financial centre. City types say the brightest and richest are moving to other parts, particularly Asia. London is uncomfortable and expensive. A £30,000 ($53,000) flat tax on foreign residents and a rise in capital-gains tax has hit the whizz kids in the pocket. Lay-offs at shrinking banks—35,000 have been announced and up to 100,000 are expected—have depressed job and bonus prospects. The golden days, when adding complexity to financial products brought immediate reward, are over.

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Then there is London’s reputation as a place to do business. The handling of Northern Rock, a troubled mortgage lender, revealed regulators with feet of clay. City lobbyists are fighting cumbersome backdoor financial meddling from Brussels. The City of London’s global financial-centres index—which in March put London and New York well ahead of other centres, though losing ground—will probably show that the gap has narrowed further when new results come out this month.

Should London care? The 2012 Olympics will provide displacement activity; London’s other invisible-export earners—shipping, insurance, commodities, professional services—seem unaffected. But the shrinking of wholesale financial markets could have a direct impact on the skyline.

Office rentals are falling, particularly in the City. (London’s West End, the traditional haunt of hedge funds and other wealth managers, seems marginally more resilient.) Building projects big enough to eclipse the Gherkin, Swiss Re’s London headquarters and the City’s most egregious landmark, could be delayed or shelved. These include the 288-metre Helter-Skelter (though demolition for it continues) and the Shard, a 310-metre splinter which, if it goes ahead, would be the highest building in Europe. Unless the City manages to reinvent itself, July 2007 may prove to have been London’s peak as a financial centre.