The London Stock Exchange (LSE) faces rising pressure in its efforts to maintain its positionas a favored market of institutional fund managers and professional investors. Customers aresatisfied with the current state of the LSE market, but member firms are pricing institutionalbrokerage and market making services below economic cost. The LSE's position will besignificantly damaged when the effective subsidy ends, and commissions and dealing spreadsreflect the costs incurred by members firms. Competition in the supply of trading services hasincreased, and a range of alternative, off-exchange trading systems could draw order flow awayfrom the Exchange market. These trading mechanisms provide order matching, crossing ofbasket and portfolio trades, and reduce investors' commissions and trading spread costs. Fundmanagers in the U.S. are using the systems more actively, and the result has been an erosionof the position of the New York Stock Exchange. The LSE's customers are also using anexpanding range of portfolio management techniques, many of which require low-cost trading,and do not demand immediate order execution, as traditionally provided by London's marketmakers. The Exchange needs to respond to the changes in fund managers' demand for tradingservices, and to the growing competition in the supply of off-exchange trading services.Enhancements to the existing LSE market structure are the best response to these threats.
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