1. Automated Real-Time Investments
Exchange
Limited (Ariel)
From the legal
point of view Ariel is just a "licenced
dealer in
securities" and accordingly
Ariel
calls itself
merely a new City
special modern
dealing technique. But if by
"stock
exchange"one
means an organization that helps certain
security-dealing firms to make their bargains more
cheaply by
providing them with standardized forms of
contract
and standardized dealing procedures, supplies
them with
information about the market price of
securities and makes
it easier for them to find
counter-
parties of
good standing, then Ariel is not just a
broker but, as
its name implies, a stock exchange.
Compared
with stock exchanges in the usual sense of
the word,
however, Ariel is different in five
respects.
Firstly,
dealing is not concentrated
physically in an
exchange
building. In London
of little
moment: as explained above, stock
exchange
business in the United Kingdom
between
dealers but is carried on to a large
extent
over the telephone.
Secondly, dealing takes place
entirely anonymously
and without any personal
contact,
not even voice
contact over the telephone. Thirdly,
Ariel, unlike
the Stock Exchange, does not have
any
listing
requirements of its own with regard to the
stock dealt
in, not even for shares of domestic issuers.
Fourthly, the
members of Ariel are the investors
themselves;
they are major institutional investors,
interested
mainly in block transactions. Fifthly,
only a few of
the members are also shareholders of
Ariel.
Some of these differences are merely
differences
of degree,
others have precedents in stock exchange
history, but
together they go to make up a new type of
exchange which
has developed in the past decade in the
markets.
Ariel is based on the American
"Instinet"
system, with
which it continues to cooperate.
Ariel was
founded in1972, trading commenced in
February 1974,
and by September 1975 Ariel had 66
members,
comprising 17 accepting houses, which created
the new system
and which own it, 8 banks, 7 trusts, 13 pension funds and 21 insurance
companies. To become
a member, a
firm must have securities to the value of
at least h 40
million under management. Even before,
19 74 these
institutional investors were handling an
unknown but
substantial volume of business between
themselves
without using members of the Stock Exchange
as
intermediaries and this business was in both bonds
and equities.
At the request of the Bank of England
government
stock is not dealt in through the Ariel
system, with
the result that trading is concentrated
mainly on
equities. Ariel restricts itself to titles
that are
listed on the Stock Exchange and brings them
gradually into
its dealings as and when members so
desire; the
system covers some 1500 stocks and bonds.
Ariel's
turnover has been around h 160 million
a year,
which is 2% of
the comparable volume of the Stock
Exchange.
Each member
has at least one keyboard terminal with
visual display
unit and printer. With this equipment
a dealer can
interrogate the system to find out the
four latest
prices and volumes of transactions in
a security as
well as price range and turnover data
for the two
previous months. At the same time he can
read the
"book", i.e. information on open orders in
this issue
which were entered into the system. In
addition, he
will see on the bottom area of the
screen a
collection of orders of other members in
various
securities specifying limits and amounts
ordered
although such amounts do not have to indicate
the full
extent of the desired transaction; these
"broadcast"
orders often are good for only a few minutes,
as can be seen
from the time of entry and the expiration
time of the
order both stated on the screen. Since
every
broadcast order qualifies for a credit of h2 which goes to reduce the sender's
membership fee, there is an incentive to make use of the system by broadcasting
orders so that they are visible to all subscribers instead of entering orders
"discreetly" in the book, in which event they are accessible only to
those
interested in the particular issue.
If a member
wishes to accept a bid or offer filed with
the system, he
enters the order number and the relevant
data and
accepts. His dealer can also call upon the
other side to
negotiate through the system by drawing
the sender's
attention to a counter offer or to a
counter bid
simultaneously entered by means of an
acoustic
signal. When a bargain is struck, a detailed
record of the
bargain will appear on the display
screens of
both parties and at the same time a contract
note will be
printed out for each of them.
All entries,
even erroneous ones, and all answers from the system are printed out in the
control room at the head office in chronological order so that every action is
recorded and can be checked. If the system should go down, an experienced
dealer is on hand at head office who can carry on negotiations or
consummate
trades by speaking to the parties over
the telephone.
Ariel is
attractive to its members for two main reasons.
Firstly, its commissions are considerably
lower than
those charged by the Stock Exchange members,
and secondly
there are no jobbers' costs. Ariel does
not offer the
immediacy service provided by the jobber.
But if a
matching order is at hand, there is no need
for this
financial service. As the orders of Ariel
members are
large orders, the cost of immediacy could
be expected to
be high. Reference should be made in
this connexion
to what was said on page 23. The savings
in commissions
by members on their transactions through
Ariel was
sufficient to cover the h400 000
development
costs and
start-up expenses of the system in the first
year of
operation. Secondly, the Stock Exchange reduced
the commission
on large orders in 19 73 in an attempt to make membership of Ariel or at least
the use of Ariel less attractive to institutional investors.
This, too, has
produced substantial indirect commission
savings.
At present
there are no market makers participating
in Ariel. If
market makers for block transactions
could be
found, they could operate within the existing
framework. But
they would have to enter their quotes
into the
system discreetly, because if the quotes were
broadcast a
confusing multiplicity of bids would
be displayed
on the screens. Unlike jobbers on the
Stock
Exchange, market makers in the Ariel system
would have to
tolerate other participants feeding
into the
system orders limited at prices inside their
quotations.
Although Ariel could be a very useful instrument for
all jobbers or brokers assembling the other side to
a block.order (see II 1b supra), it is
not used for this purpose. The Stock Exchange does not allow its members to
make use of the "new stock exchange".
the source by Dr.Hartmut Schmidt
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