The UK's Association of Private Client Investment Managers and Stockbrokers (Apcims) is calling for an independent review of the London Stock Exchange's contentious proposals to extend the hybrid electronic order book SETSmm to cover more securities.
The LSE said last week it was planning to consult with market participants on the timing and extent of a further roll out of the SETSmm service to cover lower cap stocks. The UK regulatory watchdog the Financial Services Authority is backing the action in an effort to improve transparency, reduce spreads and lower costs for retail investors.
But Angela Knight, Apcims chief executive, hit back at the Exchange's plans to extend the service by claiming that the SETSmm system is currently not suitable for most retail trades and is more costly for the end investor.
LSE says that the introduction of the system has resulted in an increase in trading along with a sustained, reduction in spreads of around 40% for SETSmm securities.
But, citing research by ITG, Knight argues that 73% of the turnover in SETSmm stock still takes place off the order book, and whilst top line spreads have narrowed, liquidity issue means that SETSmm investors may not have been able to reduce trading costs and - once the demand for liquidity to create a typical order size has been factored in - spreads are at best the same as they were before the introduction of Setsmm.
Knight says Apcim members have reported a number of concerns with SETSmm, including increased costs because of the need to use the central counterparty; absence of "depth" in the order book resulting in them going direct to market makers instead and problems of connectivity.
Says Knight: "We will be proposing that a full independent review is undertaken before any further changes take place so that collectively, there is agreement on what needs to be done and what will be in the best interest of the investor."
According to a report by Reuters, many of London's 20 to 30 market makers will meet later on this week to discuss their response to the LSE's consultation.
Reuters says the market makers will discuss the possibility of using an alternative trading venue such as virt-x, Deutsche Boerse or Euronext. Another option is for the market makers to register as Alternative Trading Systems, and bypass regulatory compliance.