Market Report: Turquoise doubts provide welcome relief for LSE

Continuing turmoil in the investment banking world proved an unlikely source of support for the London Stock Exchange, which was up almost 8 per cent, or 57.5p, at 790p.

The Lehman Brothers bankruptcy had sparked concern about the future of LSE's so-called "dark pool" trading facility, which was launched to counter competition from rival trading platforms like Turquoise. But the tables were turned last night as traders speculated about the threat to Turquoise following the sale of Merrill Lynch to Bank of America and recent sharp falls in the share prices of Goldman Sachs and Morgan Stanley. "If, like Merrill, Morgan Stanley and Goldman merge into a bigger commercial business, Turquoise will have lost three of its original backers," said one trader, referring to speculation that the two investment banks may be forced to merge with a larger commercial bank to survive the turbulence in the financial markets.

The talk took LSE to fourth place on the FTSE 100 leader board.

Overall, the FTSE 100 slipped further away from the 5,000-point threshold, down 32.4 points at 4,880. Fresh measures to support liquidity from the world's main central banks had kept the London market positive for most of the session. But early losses on Wall Street sparked a shift in sentiment on this side of the Atlantic. One market source said: "Everyone is scared and waiting for the next problem to happen. The hint or perception of a problem is a problem in these markets."

HBOS closed up 17.34 per cent, or 25.5p, at 172.6 after agreeing a deal with Lloyds TSB, which will pay about £12.2bn to take over the troubled mortgage lender. Referring to the Cruickshank report's characterisation of UK banking as a "complex oligopoly", UBS said: "For the only serious contender to the oligopoly [HBOS] to be potentially acquired by one of the incumbents confirms that these are the most interesting of times."

At close, the incumbent, Lloyds TSB, was down 15.1 per cent, or 42.25p, at 237.5p.

In the wider sector, Bradford & Bingley was down 13.79 per cent, or 4p, at 25p. Cazenove highlighted the risk posed by the mid-cap bank's pension liabilities, saying: "B&B tops the risk list [in terms of pension liabilities] with an equity holding in its fund equivalent to 75 per cent of market capitalisation, and a liability equivalent to 125 per cent of its market capitalisation."

HBOS and Lloyds were third and fourth respectively while The Royal Bank of Scotland, which was down 4.49 per cent, or 7.6p, at 161.8p, was fifth on the broker's risk list with a pension liability of £27.3bn.

Goldman Sachs moved Enterprise Inns, up 5.44 per cent, or 11p, at 213.25p, from "neutral" to "sell", citing the recent share price weakness. "We no longer see the risk/reward profile of Enterprise as materially skewed to the downside," said Goldman, anticipating "little incremental negative news" in the pub company's trading statement next week. In keeping with other assessments, however, the broker added that, as it stands, "Enterprise's financial structure is unsustainable".

Elsewhere, Goldman reiterated its "conviction buy" rating for Carphone Warehouse, the electronics retailer, which will move down to the FTSE 250 next week. Société Générale also advised investors to "buy", highlighting the potential for deal activity. The broker said, given the improving cash flow profile of the business, the cash on the balance sheet, the share price weakness and the majority stake and the attitude of management, Carphone was "a prime candidate in the even of any resumption of corporate action". "There is also, in Best Buy, an avowed buyer for the 50 per cent of the retail business that it does not yet own," the broker added, helping Carphone climb to 181.1p, up 7.8 per cent, or 13.1p.

The FTSE 250 was up 27 points at 8336.8. The precious metals producer Hochschild Mining was the strongest on here, up 25.15 per cent, or 52.25p, at 260p, after gold and silver prices shot to fresh highs as weary investors moved to protect themselves from the ensuing economic and financial turmoil. Reacting to the development, Cazenove said that the "background for a gold spike is at its most compelling". "The massive injection of capital by the US Federal Reserve has clear connotations for the US dollar and will further stoke fears over a general economic collapse. In the UK, there are genuine concerns over savings within the banking system," the broker said, anticipating benefits for Hochschild; Peter Hambro Mining, up 8.52 per cent, or 52.5p, at 669p; and Fresnillo, up 6.97 per cent, or 21.5p, at 330p.

On the downside, the video games retailer Game was down after Altium reiterated its "sell" advice for the stock. "As comparatives become more difficult in the all important run-in to Christmas, we would anticipate that like-for-likes [will] deteriorate further," the broker said, sending the stock down more than 5 per cent, or 12p, to 205p.