In the City
A thin market
Tony Rudd
The Stock Exchange had a surprise last week when the very well known firm of Can Sebag did not, in the event, merge its partnership with the larger firm of Grieveson Grant but instead just ceased trading as a prelude to the partnership be- ing wound up. The only part of the business to go over intact to the new firm is the cor- porate finance department. It seems likely that the decision to continue was not based, as many have said, on the internal difficul- ties of the firm which, though they may have been considerable, were still counterbalanc- ed by the existence of a very substantial position in the market place in general, but was more likely the outcome of the cool assessment of the market as a whole by those involved.
After all, a clue to their thinking has been given. It was apparently the plan of Carr Sebag, before the partnership sold off its extremely profitable business to the money brokers, Exco, to set up an international organisation, perhaps with its headquarters in Hong Kong, which would own the business there and in London. This would in turn have attracted outside capital, it was hoped. For one reason or another, these plans did not come to pass. Some allege because they wouldn't or didn't measure up to the requirements of the Council of the Stock Exchange in London. Be that as it may, it is clear that the original solution to the problems of the firm was seen to lie in an international structure rather than just in some rationalisation of the London business. As this was not to be, the Hong Kong business has been sold and the Lon- don office was closed. The moral of this story is not perhaps about any supposed shortfall in managerial ability in the Lon- don firm, but in its implications for Lon- don itself.
For what has been so significant about the London market recently, has not been its apparently healthy level in terms of value, with the indices of ordinary shares
pushing at their all-time peaks (either despite or because of — according to taste — the Falklands issue), but the unhealthily low level of the volume of business. On some recent days which may have been ex- ceptional, for instance on Derby Day, it is said that you could hear a pin drop in the London market. Normally this is the time of the year when business is reasonably ac- tive. After all, people are not meant to be on their summer holidays yet. That will come in the nice two-month bulge during July and August. So if there is no sudden pickup in the next week or two, nothing is going to happen until .September or Oc- tober and that means, for most Stock Ex- change firms, half the year will have gone with business, for most of them, at a level insufficient to cover their costs.
They say that the institutions still have plenty of cash, and that this is why the level of prices has been maintained; because the institutions are buying the market. Perhaps they are. All that one can say is that some of their activity must be conducted in the middle of the night when nobody can see them, because they certainly aren't there during the day.
Of course, people have cried wolf about the London market before. And yet it sur- vives. It is important to be able to distinguish between what is purely the result of the cyclical pattern of business and trends which are the product of more secular, long-term developments. Admit- tedly industry is in the doldrums, so it is not very surprising that the market should be. On the other hand, what we have been go- ing through is a bull market. Share prices have risen remarkably. The recovery to come has been discounted. That's all text- book stuff. Ten or twenty years ago there seems little doubt that a move of this kind would have been an exciting one with deal- ings at a high level. So, there does seem to be some reason to think that the low volume is part of the longer trend. If so, it's
bad news. Why is it? The basic reason for London's listlessness is its institutionalisa- tion. You cannot have volume without the players. And the institutions are not really players. They are persistent buyers, admittedly, but they tend to keep what they buy. As they represent the huge and grow" ing volume of subsidised savings (subsidised in the sense that special tax incentives are granted on an arbitrary and enormous scale) the flow tends to be one-way. An in stitution hardly ever sells. Anyhow, because of the thinness of the market to which they have so largely contributed, they couldn't and can't even when they want to. Unless they can find another institution to take the opposite view, there is nobody to sell to. 10 the meantime the small man or the in- dividual entrepreneur is a vanishing phenomenon. Not so in America. That is what's so odd. There, the individual still matters despite the fact that the institutions also have grown very large and important. Again, its the result of the different tax regime love! there. They don't subsidise savings througn insurance-linked schemes in the way that we do. The mass of people who work in America enjoy larger pay or more substan- tial salaries than their opposite numbers over here and they pay less tax. Admittedly they borrow large sums, both for housing and for everything else but they also invest on a large scale. This doesn't mean to sa, that Wall Street has had an easy time of to Many broking firms have disappeared ther! over the past fifteen years. But that b3ds been mainly because the system of fix% commissions was abolished there in Nia'f 1975. That led to a great re-structuring °s the market. Once that re-structuring wa„, over, however, the volume and the pro sperity for the brokerage business was greater than ever. Whether London could ever emulate itSe American counterpart without a cornINe tax reform being put through at the same time is doubtful. One element in fit"he transformation of Wall Street is 7:e doubtedly going to come here — that is. the abolition of fixed commissions and ale s replacement by negotiated ones. But unleso something is done to encourage the snia'; saver to reappear in the market place 05,1 small investor (and indeed, speculator) 1 change and the challenge brought about ,11,, negotiated commissions could prove not; stimulus, as it did in Wall Street, but ),.e another burden which the present structure of the London market might find diffilis to carry. The issue surely is this: when wst Government decided to let the case against the Stock Exchange's present system c, rules and usages go to the Restrictive Pr en tices Court the fair thing would have bef a to offer the market the quid pro V° ,13.ch reform of the present tax structure vv"1,0 would have bestowed tax neutrality tiPuhe the various flows of savings reaching t A
k
capital market. Taking away with one ''"en without giving with the other could tut real trouble. Furthermore, it's unfair• Bh that was never something to count too nine
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