Michael Lawrence, recently ousted chief executive of the London Stock Exchange, once made a proud boast. "I can speak," he said, "faster than most people think." On January 4 he put his eloquence to the test - and failed.
Lawrence had just learned that the exchange's board was considering his future. He asked for, and obtained, permission to explain why he should keep his job. He obviously wasn't convincing. A vote was taken after he left the room, then exchange chairman John Kemp-Welch briefly explained the meeting's decision. "He was out in 15 minutes," recalls a source close to Lawrence. "He was summarily dismissed."
Although Lawrence didn't know it, Kemp-Welch had called the non-executive board members the day before the meeting to inform them that the exchange's appointments and remuneration committee had recommended that he go. It happened that three of the committee's four members - top officials from BZW, Merrill Lynch, and SBC Warburg - had adamantly opposed a proposal which Lawrence had been pushing, to alter radically trading practices in London by moving to an order-driven system. "I think what you saw on the third and fourth of January was a massive coup," Lawrence told the House of Commons' treasury committee last month.
A treasury official had put it to him even more succinctly: "That's a real stacked deck, Michael." The "stacked deck" included Donald Brydon deputy chief executive of BZW; Michael Marks, deputy chairman of Merrill Lynch International; and Nicholas Verey, managing director, corporate finance, SBC Warburg. (Verey has been temporarily replaced in his stock exchange duties by David Wenman, global head of training, because of illness.)
Lawrence felt betrayed by Kemp-Welch. He told the committee that the chairman had supported his efforts and that he had even remarked to Lawrence towards the end of 1995 that "every time we've been faced with a strategic decision the market-makers have been wrong. We must not let them be again." Moreover, at his final meeting with Kemp-Welch, the only reason given for his dismissal was that the board had lost confidence in him. "I asked him for an elaboration at the time and received no elaboration," Lawrence said.
Lawrence had been in his job for less than two years. What had gone so terribly wrong?
Talk to the players closest to the situation and a story emerges in which the sides are so split, it is difficult to know whom to believe. It is possible that a certain myopia in Lawrence's make-up left him unable to see that what he regarded as "openness" and "consultation" was viewed as just the opposite by important factions on the exchange's board. Yet the board itself failed to communicate to Lawrence its mounting dissatisfaction. It is no small irony, as one MP on the committee noted, that the brusque executive qualities so admired in the City when it comes to streamlining industry were found somewhat less palatable when applied in its own parlours.
Interestingly, Lawrence himself does not attribute his dismissal to the proposed shake-up in trading practices. Rather, he told the parliamentary committee: "My own conclusion is that the real issue was the fact that we were increasingly managing the exchange in a commercial and professional way."
And he rejected outright the accusation that he wasn't listening to board members, suggesting that the problem was that he was listening to too many market users rather than just the dominant members: "I believe the quality of a chief executive is that he listens to all the market participants and not just to some of them." Furthermore, he warned that if the exchange continued to be dominated by big market-making firms opposed to change then it would fall apart within two years.
When Lawrence took his post in February 1994, the exchange's morale and reputation were at an all-time low. His predecessor, Peter Rawlins, had resigned after being blamed for £400 million of losses on the development of the Taurus settlement system. The exchange had too many staff and its revenue base was rapidly shrinking. Most seriously, it faced rivalry from Tradepoint, an electronic trading system that had applied for government approval to operate as an exchange. This demonstrated that institutional investors could, in theory, deal directly with one another. The dominance of market-makers and brokers, the core of the exchange, could no longer be taken for granted.
As far as the exchange's board was concerned, Lawrence must have seemed the ideal person to turn things around. As chief financial officer at insurer Prudential Corporation, he had formed good contacts with the Bank of England (BoE) and the Confederation of British Industry. Earlier, he had spent 15 years at accountants Price Waterhouse, where he had forged links with the government through the firm's privatization work.
Undiplomatic service
At Price Waterhouse in the early 1980s Lawrence worked closely with Nicholas Ridley, a cantankerous government minister who approached privatization with a hard-headedness even some devotees of Margaret Thatcher found unsettling. Like Lawrence, Ridley was not noted for diplomacy. But Lawrence admired Ridley as a man who achieved his objectives in the face of extraordinary opposition. One of those achievements, in which Lawrence was closely involved, was shutting down east London's docks. Lawrence also helped him privatize the bus industry.
At the Pru, Lawrence had been instrumental in helping chief executive Mick Newmarch reorganize the company, shedding its loss-making estate-agency business and other peripheral activities and bringing in new management.
The pugnacious, controversial Newmarch, who had himself been CFO before becoming chief executive, saw Lawrence as his logical successor. But Lawrence believed he would have to wait too long for that to happen. "There was something about him that wanted to be number one," says an acquaintance. It was probably that, as much as anything else, which persuaded him to put his name up for the stock exchange job.
Lawrence clearly saw himself as a manager of change. But bargaining with union officials or company employees was one thing; the London stock exchange, which has been stumbling towards change for more than a decade, wanted a softer, less hurried approach. Lawrence moved aggressively from the start.
The most controversial issue facing the exchange - and the issue that crystallized opposition to Lawrence - was the move to introduce an order-driven system to supplement or even supplant the traditional quote-driven market (where market-makers undertake to provide continuous two-way prices). Such a move could, as exchange members are only too aware, amount to a second Big Bang, an overhaul of trading practices so radical that market-making would no longer be central to the London market. With trades matched and executed electronically, would commission-charging intermediaries be needed at all?
The exchange had been moving in this direction since before Lawrence arrived, and many factions, including Andersen Consulting - the firm hired by Rawlins to overhaul the existing system - thought an order-driven market was inevitable. But the idea was to move towards it gradually. This would be accomplished by developing the Sequence programme, an electronic trading platform intended to bring together all the exchange's information, trading and reporting systems. The project was launched in October 1993. Since then, five of Sequence's six phases have been completed, including a service called Seats Plus, which allows for remote entry of exposure orders and the capability to execute those electronically.
The most difficult decision concerned the sixth and final phase, in which the existing Seaq (Stock Exchange Automated Quotation) and Seaq International systems would be replaced by the new platform in August 1996, the month the new settlement system, Crest, was scheduled to start. The fundamental question was, could the two systems operate side-by-side? If not, what would happen to market-makers? If so, what value would market-maker prices have next to prices based on last orders? Or would the new order-driven system simply be available for the most actively traded shares, while market-makers posted prices in other shares? And how would block trades be executed? The exchange has been grappling with these questions for more than a year. It now seems clear, however, that there is virtually no support for a hybrid approach, at least among market-makers.
When Lawrence took over, Andersen Consulting had reached a crossroads. It needed to know whether or not the new system should include the capability for order-matching. Lawrence put it to the board at a meeting in April 1994. "We said you'd be daft not to put it [order-matching] in, so we'd have it there," says Scott Dobbie, chairman of NatWest Securities. Dobbie himself is not a board member but has been closely involved in the decision-making. The members agreed with little hesitation that the capability should be installed, but on condition that the question of activation be brought to them again in the later part of 1995 and that there should be firm proposals as to how it would be used.
Meanwhile, Lawrence started making the rounds. He began reshaping the executive, recruiting fresh talent and moulding it more to the model of a real company. He put full-time exchange executives in charge of practitioner committees, in order to improve lines of communication, and widened the consultation process by soliciting opinions from outsiders - in particular US institutional investors. "We were moving away from a club. We were moving to a properly directed organization," he told the committee. After nine months with no chief executive - it took that long to find a suitable and willing candidate to take on the job - the City seemed willing to give him a chance. "We thought he was a breath of fresh air," says Dobbie.
But Lawrence had a tough job ahead of him. In the 10 years since Big Bang, institutions' investing power had increased dramatically. At the same time, virtually all the market-making firms had been taken over by big banks, or were about to be - and the markets these banks dealt in were becoming more closely connected. The stock exchange was only one part of a much bigger, more complex picture, and many thought the cost of doing business through it was too high. Posted prices had become far less indicative of the real prices at which most shares changed hands. The exchange itself maintained that 60% of bargains above £10,000 were executed "behind the screen" - that is, at prices at, or better than, the buy and sell prices on traders' Seaq screens. And while market-makers could offload positions through their inter-dealer broker (IDB) market, which offered much tighter prices, institutional investors and other dealers were left out in the cold.
Many firms saw that change was inevitable, but the degree of support for it varied. For some, the move toward an order-driven market made sense. Not only were most large orders executed behind the screen; for many of them, equity trading was only part of a whole range of interrelated activities, such as derivatives sales and trading and corporate finance. They might make better use of capital if it wasn't tied up making continuous markets.
Spreads too wide to bear
Added to this pressure was the fact that European trading was migrating back to the continent as exchanges there began to modernize. Between 1990 and 1994 quoted spreads on Seaq International roughly doubled. By October 1995, the situation had got so bad that the London exchange was forced to impose new limits on quoted spreads.
"Essentially, dealers have abandoned their market-making commitments to the system," said Benn Steil in a recent study of European equity markets for the Royal Institute of International Affairs. "Pro forma quotes are posted merely to keep within exchange rules and to advertise a dealer's availability. Many London trading houses continue to commit significant capital to European equity dealing, but competitive prices will now generally be made only over the phone."
Lawrence saw himself as a man with a simple task: "To move the exchange into the new world," he says. With the launch of Tradepoint in September 1995, the exchange had finally lost its monopoly. "That was the catalyst that Lawrence was hooked on to," says a leading market-maker. Lawrence was blunt about the problems, telling people that the yellow strip of buy-sell prices on Seaq screens represented "the worst prices on display". He also had to tackle the problem of shrinking revenues: about one-third of the exchange's annual operating costs were covered by settlements, a business that is likely to migrate to the BOE with the onset of Crest.
Nevertheless, the tradition of risk-taking has for so long been associated with market-making that to hear some traders talk about it, the one can't exist without the other. And, they asked, why effectively open the IDB market to outsiders? Smith New Court, a conservative firm with a long tradition in market-making (now owned by Merrill Lynch), was said to have put up stiff resistance to the change, probably worried that its role would disappear. BZW has a slightly different problem. Its profitable, proprietary electronic trade-matching system (used mainly for retail business) reaps the benefits of the touch - the spread between the buy and sell prices posted on Seaq - which averages some 0.7% to 0.8%. That spread would be significantly reduced in an order-driven system and such a system would pose a threat to its own.
The question of how Lawrence handled the reforms was as much of an issue as the reforms themselves. He upset many traditionalists simply because he did not fit into their "club". He went to a state-funded school and was not of the conventional upper-class City mould - unlike, say, John Kemp-Welch, the stock exchange chairman who helped pick Lawrence and was later to dismiss him.
Tenacity but little tact
It was never going to be possible to satisfy all 350 exchange members, but Lawrence at least had to aim to get a consensus among the bigger firms. For this he needed diplomacy as much as tenacity. Unfortunately, he lacked the former. "That was where Michael was weak," says a business acquaintance. "He is basically shy, but he's learned to cover that shyness with a high-quality mind. He does not suffer fools gladly; nor is he a political animal."
In his last annual report, Lawrence claimed to listen to practitioners: "I have encouraged greater input from users," he wrote, "and this has resulted in improved consultation lines. A policy of greater openness has made decision-making considerably easier."
Others, however, say he took a dictatorial approach to decision-making that left little room for practitioners' input. Views would be aired at committee meetings, then promptly ignored, they maintain. In a dispute last September, Lawrence issued a libel writ against David Jones, chief executive of retail electronic trading system ShareLink, allegedly without consulting the chairman. "It was a symptom of a very impetuous man," says an executive of a leading market-making firm.
It's said that at board meetings he would wait until the end and push changes through without allowing time for consultation. "On several occasions things came up at the end of a board meeting where he would say he was setting the agenda," maintains an official.
A relatively minor instance was when Lawrence announced a reporting change affecting international trades involving London. This angered firms with a lot of international business, which regarded it as cumbersome and unnecessary. "Morgan Stanley was apoplectic," the official says. That wasn't the only way Lawrence upset people. "He'd be very helpful and friendly, then suddenly he'd make this outrageous remark," says another leading market-maker. At a formal dinner in the City, a quip allegedly offended Bank of England (BoE) governor Eddie George, who was seated nearby.
Behind the scenes, both BoE director Ian Plenderleith and Kemp-Welch encouraged Lawrence to press ahead with change. "The BoE was always for this change; Ian was gung-ho," says a source. Plenderleith believes market-making firms will continue to have an important role in the secondary market if London is to remain the "market of choice" in Europe, simply because they will provide liquidity. "Half the battle is to try to explain that," he says. "A lot of market-makers are perfectly happy to change. They're not making a lot of money." Likewise, Kemp-Welch, with whom Lawrence had a "working relationship", was presenting no obstacles. So the executive markets team, led by Giles Vardey, advanced the Sequence programme, travelling widely to demonstrate how it could work. It met with a less than enthusiastic response from some of the big British firms, although US institutional investors and trading firms such as Salomon Brothers welcomed the prospect of change, City sources say.
The biggest immediate challenge to the exchange was how to incorporate an order-driven system while retaining market-making. Privately, many of those working on the system weren't convinced it was possible, including Andersen Consulting, but the point was to keep the dialogue going and to keep the members happy as far as possible. "It's no secret that for us to run a marketplace we have to satisfy our member firms," says Vardey.
Trying to satisfy all sides was already difficult. To the annoyance of some market-makers, the exchange was also trying to please non-members. Among others, Lawrence was consulting US institutional investors. "We know some US institutional investors were not happy with the UK system," Vardey says "They didn't understand the market-maker system. They felt it was stacked against them."
This was like a red rag to a bull. Many market-makers felt the exchange had gone too far: some of the institutions were clients of member firms. Lawrence was accused of putting relationships at risk, though Vardey and others say this is unfair. "The issue that somehow we shouldn't be talking to people who use the marketplace is just silly," he says. "They [US institutions] clearly are an important force, just as in the early 1980s the biggest factor in Europe was the UK institutions."
Lawrence felt he was on a "knife-edge" and that "it was really a question of whether the big market-makers could muscle enough firepower" to thwart the move toward order-driven markets, a source says.
Straight talking at table
A dinner attended by Lawrence and some of his colleagues, with BZW chairman Peter Middleton, was particularly unpleasant, the source says. "He [Middleton] was saying that change was inevitable but that it wasn't in BZW's interest. He was very straight about it." Lawrence's critics say he could have done more to persuade other market-makers that change would not necessarily mean extinction. But questions were also being raised whether Kemp-Welch himself couldn't be doing more to support Lawrence's efforts. "He's a broker. He never sought to broker it," says the source. Similar criticisms are made of Kemp-Welch's relationship with his board. "He would joke in private about what lousy decision-makers [the board] were," says the source, "but there was no effort to mediate."
The reform campaign intensified in the run-up to the meeting on November 30 that was to decide whether to move forward with Sequence. Speaking at a private gathering of City lawyers and investment bankers in mid-November, Lawrence warned that without changing the current system they risked losing international business. "We have to reposition the exchange to maximize its potential in an increasingly competitive world. If this is a new chapter, we have to be clear about where we're going. No stone can be left unturned, no cow can be too sacred."
As the debate continued, the exchange's position in relation to the rest of the Europe began to look weaker and weaker. Rudolf Mueller, chairman of UBS UK and the exchange's only continental non-executive director, had left the board in disgust in July 1995; in early November he spoke publicly for the first time about his reasons.
Mueller said the exchange had missed its chance to become Europe's central share-dealing system by relying for too long on Seaq International. With new EU rules allowing "remote membership" of European bourses by members sited in other EU countries, investment banks in London could execute business in Paris, Frankfurt and other European cities.
Mueller's remarks followed, by a week, NatWest's announcement that it would reduce its use of Seaq International in favour of local bourses, a move that had already been made by UBS and other leading investment banks.
Then the BoE weighed in with a call for the exchange to cooperate with other European bourses to facilitate cross-border dealing. "It is up to the London Stock Exchange to decide whether it would be best served by a 'beat them or join them' attitude to continental exchanges," BoE executive director Pen Kent said at the inaugural dinner of the City Group for Smaller Companies.
Lawrence wasn't opposed to cooperation; he involved the exchange in a number of reciprocal visits with foreign counterparts, and said that "our joint goal should be to facilitate cross-border markets and to simplify rules which may obstruct free trade". But he and the BoE saw the key to London's success in a strong central market; and that in turn relied on successful implementation of the Sequence project, still on track for completion during the summer of 1996.
But by then complaints about Lawrence were being channelled to Kemp-Welch, who shared an outer office space with the chief executive. While board members were pleased with many of Lawrence's accomplishments - he had introduced AIM (a market for smaller-company shares), a shorter settlement period and a global depository receipt programme - they were deeply unhappy about the manner in which he made decisions. Theie main concern was Sequence, but the ShareLink suit and other smaller episodes were also irritants. One board member charged that: "He is an exceptionally difficult character and was not accustomed to working with the board."
Personality or policy?
Lawrence's supporters maintain that the issue was not his personality but the fact that he was pushing through with Sequence. They say that the big market-making firms were making a last-ditch effort to stave off reform. Where the truth lies is difficult to say. With preparations under way for the crucial November 30 board meeting, Vardey had prepared a paper that must have made stark reading. Among other things, it said that 17% of the market value was already traded through an order book provided by IDBs, and that more than 30% of the volume of trading (essentially the retail market) was already traded on an automated basis through order-routing systems provided by proprietary networks operated by member firms (much of this presumably through BZW).
"Many large trading houses at the core of the system," the paper said, "have a defined list of clients to whom they wish to risk capital: these are also clients who are the most important for primary and new-product distribution and significant order flow. There is an increasing reluctance by those houses to risk that capital on a wider basis to the entire marketplace: the returns are inadequate or negative. In this environment, market-makers prefer to unwind risks anonymously through the IDBs' order-matching systems rather than display it to all comers."
By then, the move towards Sequence's completion was all but unstoppable. At the board meeting Lawrence warned that the decision over how it would be implemented would have to be undertaken after consultation. It was agreed that a consultation document would be prepared for release in January and that a committee would be formed to review the comments and make recommendations to the board on March 21. BZW, Merrill and SBC Warburg all registered strong opposition to proceeding with the order-driven system, saying more time was needed to study costs and other issues, said Lawrence. Nevertheless, the board voted to proceed.
Despite the decision to proceed, there was so much discontent in the market over how the changes would be implemented that a group of market-makers agreed to formally protest to Kemp-Welch. They decided this should be done by Lord Rockley, chairman of Kleinwort Benson, and Martin Owen, chief executive of NatWest Markets.
According to Kemp-Welch, the meeting in mid-December concerned Lawrence only peripherally: "The meeting with Martin Owen and Lord Rockley had been asked for by major member firms to act as a messenger to relay their concerns about their fear of lack of involvement in the consultation process."
The result of the meeting was to install three practitioners on the new board committee set up to oversee the Sequence consultation process. "This question of personalities, and Michael Lawrence in particular, virtually wasn't mentioned," insists Kemp-Welch, "and there was no connection between that meeting and what subsequently happened."
That, of course, was the board meeting on January 4 and Lawrence's unsuccessful defence. Then came the blunt official statement: "Following a board meeting today, the stock exchange announces that its board, having lost confidence in its chief executive, Mr Michael Lawrence, has required his resignation with immediate effect."
Misleading bonus
Concern about Lawrence had been building for months. A leading board member says that "the die was already cast. He would be a pretty stupid man if he hadn't seen the winds blowing." Yet Lawrence apparently had never received a direct warning that his job was on the line; in fact, he was awarded a £100,000 ($155,000) bonus in 1995. As far as Lawrence was concerned, both Kemp-Welch and the BoE's Plenderleith supported his agenda. He told one City editor just before Christmas that the fact he had got Sequence approved meant the City was finally going his way.
Shocked by Lawrence's sacking, the treasury committee launched an investigation into the affair. Committee members were sharply critical of the exchange. Conservative MP Quentin Davies accused it of complacency and said it was suffering "something of an identity crisis". The committee chairman, Conservative MP Sir Tom Arnold, said the panel would have to consider whether it was necessary to impose legislative changes on the exchange to ensure that trading practices were "fair" as required by the Financial Services Act.
At the very least, there were suggestions it might ask the Office of Fair Trading (OFT) to investigate charges that the exchange is anti-competitive because of the dominance of a few market-makers. Last November the OFT requested changes in the reporting of big trades after finding the rules contained significant anti-competitive elements. Lawrence told the committee: "I received no warning at any time that I did not enjoy [the board's] support, although we were all aware of the opposition of certain market-makers."
