Order-driven e-trading due at the Stock Exchange

20 October is set to see the most significant change to the London stock market since the 'Big Bang' reforms of 1986. A board meeting at the end of the month is expected to confirm that, finally, it is the day on which order-driven trading will be introduced.

In technology terms, the new style of share trading also represents the completion of the electronic market, which began with Big Bang. And it will require substantial investment in technology by dealing firms to support what is expected to be a much busier marketplace.

The system will at first apply only to the Stock Exchange's top 100 shares. It will allow buyers and sellers of shares to trade directly with each other, without having to deal with an intermediary. At present, all shares are traded through a market-maker - a company such as BZW or Merrill Lynch - which charges commission for acting as partner to all deals.

Proponents of the new approach argue that it will reduce the costs of dealing, because market-makers' commissions will be eliminated. It also allows investors to see easily, on a single screen, the prices at which brokers are offering to buy and sell shares.

At its simplest level, this new approach requires stockbrokers to introduce a new interface to the Stock Exchange's platform, Sets - developed by Andersen Consulting under its long-standing outsourcing arrangement with the Stock Exchange.

Smaller clients tend to rely on off-the-shelf products from Datastream/ICV or Reuters, which will have to be upgraded. Datastream, for example, charges #250 a seat to upgrade its software for dealers. Larger firms will have to adapt their bespoke systems.

More significantly for the long term (and the short-term employability of dealers), the new platform will enable orders to be executed electronically for the first time. This could fundamentally change trading strategies - humans are no longer essential to the equation.

'For the first time you can automate the entire trading process - from firing a trade into the order book, to notifying the back office and sending a settlement instruction to Crest - without human intervention,' said Richard Ward, head of consultancy services at EDS Citymax.

Eliminating people, however, is a panacea best taken with caution. 'That creates a risk of software error. The regulator, SFA, looks carefully at issues like capital adequacy, but it doesn't look at faults in software,' Ward added.

The experience of other order-driven markets (now almost every stock exchange in the world) suggests that an order book generates a far greater volume of activity. Electronic execution of trades allows firms to automate trading strategies - buying or selling all holdings when the share reaches a given price far faster than a dealer holding two phones ever could.

Brokers are also expected to disguise some large trades by dividing them up into smaller parts. And finally, if the order-driven model is as successful as it is supposed to be, overall volumes will increase.

Crest estimates that settlement will increase by 15% to 25%, implying a 50% to 70% rise in the total number of transactions. Handling that volume requires more kit - particularly for large brokers.

When Merrill Lynch undertook an infrastructure upgrade to handle the volumes from the Halifax flotation in June, it brought forward its plans to accommodate the order-driven market. Now the company claims it can handle up to four times its current daily volume of 23,000 transactions, which it believes could rise to over 40,000.

For settlement system Crest, the margin is potentially tighter. Until it upgrades its Tandem hardware at the end of February to the company's ServerNet architecture, it faces settling 150,000 to 160,000 transactions in a normal day, against maximum capacity of just over 170,000 transactions. ServerNet has only just become available, and Crest requires at least six months of testing and tuning before it can replace its existing system.

But CrestCo executive Iain Saville remains sanguine about the situation. If the projections are right, the volumes are well within Crest's capability. 'We're not relaxed, but we're certainly not panicking,' he said last week.

'We believe it will take a while before the higher volumes come through.'