London Exchange ‘Big Bang’ More Like a Thud : Securities: The electronic stock market is far short of the potential envisioned nearly five years ago, when the market was deregulated.

Nearly five years after the “Big Bang” deregulation of Britain’s financial markets, experts say London’s pioneering electronic stock market isn’t living up to its potential.

Deregulation was supposed to sweep away London’s clubby cartel of stock dealers and create a fast, accessible and bigger electronic market of the future. But critics say there aren’t enough stock dealers, trading is too expensive and small shareholders are losing out.

“London’s potential is very, very good,” said Michael Selby, who teaches finance at the London School of Economics. “(But) it’s not happening yet.”

The London Stock Exchange concedes that some criticisms against the system are valid, and it is seeking to address them.

The Big Bang brought in an electronic automated quotations system that moved trading off the exchange floor and onto securities firms’ trading floors. It also opened the securities business to commercial banks and foreign firms.

Deregulation allowed more firms to become market makers, who buy and sell shares from their own inventory. Market makers are required to quote prices on the electronic system continuously; buyers and sellers look for the best prices.

London’s market is based on the United States’ NASDAQ electronic over-the-counter system, which began operating in 1971.

By comparison, the New York Stock Exchange, the Tokyo Stock Exchange and most of the world’s other stock markets are centralized marketplaces where buyers and sellers meet on a trading floor and agree on a price.

London’s system provides continuous trading and liquidity--or plenty of stock to buy and sell--while the other markets can break down under a flood of sell orders, its proponents say. That contention isn’t entirely supported by the facts.

During the 1987 stock market crash, London’s exchange stayed open, while many other European exchanges buckled under selling pressure. But in the United States, the New York Stock Exchange never closed, which its supporters say saved the world financial system from a meltdown. Meanwhile, many U.S. electronic traders simply abandoned their posts.

Since many firms now are owned by publicly held banks, much more is disclosed about what goes on in the once-secretive London securities industry, and regulation has much improved, said Robin Hutton, director-general of the British Merchant Banking and Securities Houses Assn.

But there are still problems and complaints.

Volume on the exchange shrank to 130 billion shares in 1989 from 150 billion in 1987. Part of the decline is due to a slump in equity trading since the stock market crash that has hindered profits at many firms.

One complaint about London is that there aren’t enough market makers in each stock to avoid a cartel. And many small stocks don’t have market makers, making it difficult to trade those shares.

London has 23 equity market makers, down from a post-Bang peak of 33, but still more than the pre-deregulation 17. More than 200 of the exchange’s over 2,000 domestic stocks had just one or no market makers in September.

Another criticism is that some market makers allegedly avoid trading when the market is falling sharply by refusing to answer their phones or taking them off the hook--precisely what happened during the 1987 crash in the United States.

Market makers say that if investors can’t get through, it’s because traders are busy. The firms are running leanly and can’t afford to keep extra traders, they say.

Critics also said London’s spreads between the buying and selling prices are too wide. The average spread for primary stocks in September was 2.43%, compared to a pre-crash average of 1.22%.

The large spread results from London’s relatively high trading costs. Market makers must put up their own capital to build up stock inventory and securities houses need expensive computer and telephone systems to trade.

Small investors have to pay for a commission and the spread, while institutional investors can find commission-free service. Some firms refuse to handle individual customers because of the expense.

Another complaint is that the British paper settlement system, which completes share transactions, is too slow and cumbersome.