The U.S. discount rate was cut and U.K. base lending rates fell by 0.5 points to 9.5 percent before the government announced an acceleration in Britain's inflation rate and a higher than expected public sector borrowing requirement.

In London, usually deserted offices were buzzing with excitement as stocks rallied in response to lower borrowing costs, before dropping back again in response to disappointing U.K. economic news.Several securities houses admitted to substantial trading losses - but no one looked too unhappy. For all this was a dress rehearsal for the new-style U.K. government securities (otherwise known as gilts) market that comes into operation on Oct. 27 - Big Bang day, when Britain's stock markets are liberalized.

In a two hour session, the Bank of England provided each of the 27 new primary dealers with a different gilts portfolio and then bombarded the market with economic statistics. A second practice run is due to be held on Oct. 18, when simulated dealing inequities will be included as well.

Although no real money was made or lost during the Saturday morning, there was no question of treating the rehearsal lightly. Once the new trading arrangements come into operation at the end of the month, gilts market makers are likely to find the going very tough indeed.

The Bank of England and market participants felt it was essential to test out new electronic dealing systems and give inexperienced traders a taste of the market before going live. There will be no more fun and games then, it will be more a matter of survival. Few analysts expect all 27 primary market makers to survive, and some are anticipating a bloodbath.

Even before Big Bang, there have been rumors circulating that a number of major investment houses have suffered heavy losses during volatile conditions in the secondary gilts market over the past few weeks. Merrill Lynch was forced to issue a statement denying that its chief gilts dealer had been dismissed after the firm had allegedly run up tens of millions of pounds worth of losses on its gilts portfolio.

The main worry concerns market capacity, and whether there will be sufficient volume ofbusiness to keep all 27 firms profitable. Most think not. On average, around $2 billion worth of U.K. government stocks are traded in London each day. This figure would need to grow substantially if all 27 market makers are to stay in business.

The present trading system is built around The stock exchange's unique single-capacity rule, under which a member firm may either be a jobber (market maker) or a broker, but not both. A jobber is required to maintain two-way prices under all market conditions, and has no direct contact with retail investors. A broker acts as agent between the client and the primary market maker.

Just a couple of jobbers have specialized in gilts, while another securities firm, Mullens & Co, has been the government broker since 1786.

But from Oct. 27, there will be no distinction between jobbers and brokers, and the Bank of England will be dealing on its own behalf in the market.

The stock exchange was forced to abolish its restrictive trading practices at the insistence of the government. Limitations on outside ownership of member firms were lifted earlier in the year while fixed minimum commissions end on Big Bang day.

No serious traumas are anticipated as far as equities trading is concerned, but within a year the number of primary gilts dealers could be substantially reduced. And overall, many senior bankers expect the world investment markets to be dominated by just 10 or 20 big conglomerates within five years.

Relatively undercapitalized London firms may be hard-pressed to compete as

financial markets become more globalized and interconnected.

Hence the seriousness with which the dry runs prior to Big Bang are being taken. The Bank of England was able to test out its newly equipped gilt-edged dealing room, packed with highly sophisticated electronic equipment. The 27 primary dealers also had a chance to see how their computer systems coped with hectic market conditions, and to get acquainted with the six new inter-dealer brokers who will provide dealing facilities between the market makers.

With the countdown to Big Bang into the final stage, market participants only have a few more days to iron out any bugs in the system before London's cosy and protected world of securities trading disappears for ever and free market forces take over.

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