The London Stock ExchangeWhen members of the investing public wish to buy or to sell a particular security,
they typically e-mail or telephone their broker. The broker can immediately access the
display of the prices at which various dealers are prepared to trade. These prices will
normally differ from one dealer to another. This is because estimates of the value of
the security concerned will vary from dealer to dealer. The ‘inventories holding’ posi-
tion of the particular dealer at that particular moment will also influence the prices on
offer. A dealer with a bear position may well be prepared to pay a higher price to buy
the particular securities than one with a bull position. In respect of a particular secur-
ity and a particular dealer, the SEAQ screen will display two prices. At the lower of
these the dealer is prepared to buy and at the higher one to sell. The same information
is available to all members and to others who wish to subscribe. The broker can tell the
client what is the best price in the security according to whether the client is a poten-
tial buyer or a potential seller. The client can then immediately instruct the broker to
execute the trade at this best price or to do nothing. If the client wishes to go ahead
with the deal, the broker executes the transaction immediately and without any direct
contact with the relevant dealer business (using the SEAQ terminal). The effective con-
tact between the broker and the dealer is through SEAQ. The system automatically
informs the dealer concerned that the trade has taken place and provides a record of
the details of the transaction. Although anyone can be provided with the SEAQ infor-
mation, only LSE members can use that information directly to trade through SEAQ.
The ‘quote-driven’ approach, of which SEAQ is the modern embodiment, has long
been the standard way that the LSE operates. This approach has, however, been crit-
icised by investors on the grounds that, since dealers seek to make a profit from each
transaction, additional and unnecessary costs have to be borne by investors. It is
argued that, since ultimately, each sale of securities by an investor leads by way of the
market maker to a buying investor, it would be cheaper for buyers and sellers to deal
directly with one another, without a dealer being involved.
In 1997 the LSE introduced an ‘order-driven’ system, the Stock Exchange Electronic
Trading System (SETS), which now runs alongside SEAQ. Here would-be buyers and
sellers of the shares of a particular business enter (through their individual brokers)
information about their wishes on an electronic screen for that particular share. This
information, which does not show the identity of potential buyers and sellers, includes
the number of shares that they wish to buy or sell and the maximum and minimum
prices, respectively, at which they are willing to trade. Where SETS can match two
entries, it will automatically effect the transaction. Naturally, a particular would-be
seller may not wish to sell the same quantity of the shares as a would-be buyer wishes
to buy. Here SETS would carry out the transaction for the lower of these two quantit-
ies and leave the outstanding balance displayed on the screen.
Critics of the SETS approach argue that the intervention of dealers ensures that
there is always a buyer or seller for particular shares, i.e. a dealer. It has been argued,
however, that in practice it can be difficult to buy or sell particular shares at certain
times, despite the existence of dealers.
Irrespective of whether the transaction has been effected through SEAQ or SETS,
brokers must be involved. Only members of the LSE can trade. Brokers charge their
clients a commission, which is their source of income. These dealing costs tend to be
significant, particularly on small transactions, though they typically become propor-
tionately lower on larger ones.
Brokers offer their clients a range of professional services related to investment,
rarely viewing their role in the narrow sense of buying and selling agents. They are, of