exchange) and its efficiency 9 The secondary capital market (the stock
screening securities before authorising them is to try to avoid members of the invest-
ing public from losing money by buying very hazardous securities.
There are currently about 1,130 UK businesses whose shares are listed by the LSE,
with about 120 of these accounting for about 85 per cent of the total value of the shares
of all 1,130 businesses (London Stock Exchange 2007). LSE members have two roles.
The first is as market makers or dealers, equivalent in principle to a trader in a street
market. Each dealing business specialises in a particular group of securities, in much
the same way as traders in street markets tend to specialise in fruit, or meat, or fish.
The second role is as agents of the public who wish to buy or sell through the LSE
(brokers).Dealing on the LSE
Dealers
Dealers will usually be prepared to buy or sell irrespective of whether they are imme-
diately able to close the deal. Thus dealers will normally be ready to sell securities that
they do not at the time possess (short sell) or to buy those for which they have no
immediate customer. It is only with very rarely traded securities and with exception-
ally large orders that dealers may not be prepared to deal either as a buyer or seller.
Any unwillingness on a dealing business’s part to make a market in a particular secu-
rity on a particular occasion may damage the dealer’s reputation. This could have an
adverse effect on the future trade of that dealer. There is therefore a sanction against
dealers who fail properly to fulfil their function as market makers.
At any given time, a particular dealing business will typically hold tradinginvent-
ories, either positive or negative, of some of the securities in which it deals. Where the
inventories position is a positive one it is said to hold a bull positionin that security,
and where securities have been sold that the dealer has yet to buy in, it is said to hold
a bear position.
Dealers are risk-taking market makers. When dealers buy some securities they
judge that they can subsequently sell them at a higher price. Similarly, when they sell
securities that they do not possess (where they take a bear position), their judgement
is that they can buy the securities that they have an obligation to deliver, at a lower
price. If they are wrong in this judgement it could be an expensive mistake, as they
may have to offer a very high price to encourage a seller into the market. Members
who act only as dealers make their living through profits from trading.The dealing process
Until the mid 1980s virtually all LSE transactions were conducted on the floor of the
LSE. Here, each dealer business would have its own ‘stall’ to which brokers could
go to deal on their clients’ behalf. To deal at the most advantageous prices it would
have been necessary for the broker to call at the stalls of all, or at least a good sample
of, dealers who dealt in the particular security concerned, to compare prices. Now
the ‘floor’ of the LSE is, in effect, a computerised dealing system, though in essence
the dealing process remains the same. The Stock Exchange Automated Quotations
system (SEAQ) allows dealers to display their prices to interested parties, both
members and non-members, and constantly to update those prices. It also enables
LSE members to deal directly using a terminal linked to SEAQ, without leaving their
offices.