View from City Road: No further delay on disclosure

The Office of Fair Trading has had its sights set on the absurd rule that allows market makers to delay disclosures of large share deals, more or less since it was introduced in 1989 as a post- Big Bang protection for City dealers. Now it has some hard evidence.

Gordon Gemmill, professor of finance and banking at the City University Business School, has studied almost 6,000 large transactions in the shares of 26 FT-SE 100 stocks under three different disclosure regimes. And he concludes that the only benefit delayed disclosure brings is to the profits of the firms that take advantage of it.

Until 1989, all trades had to be disclosed immediately, regardless of their size. In 1989, that was changed to allow dealers 24 hours to disclose deals of more than pounds 100,000. Two years later, that was reduced to 90 minutes for deals three times the normal market size for that share. Last December, a further distortion was slipped in when dealers were given five days to report deals more than 75 times the normal size.

Market makers insist that these perks are essential to a liquid market. Why would a trader want to risk his capital taking on a large block of shares if rivals could scupper attempts to find a home for it by marking down the price? Delay gives a breathing space to feed the stock out.

Nonsense, says Mr Gemmill. There is no evidence that delayed disclosure helps liquidity. But there is ample evidence that having exclusive access to dealing information gives a significant advantage to those in the know, because share prices invariably move sharply in advance of the formal announcement. By the time disclosure is made, it is far too late for small traders or private investors to do anything.

The OFT may release Mr Gemmill's findings in a discussion document. It should go further, and recommend to the Government that delayed disclosure be abolished.