Trading Mood Turns `Bouncy'

RISING confidence is the current keynote on the London stock market, and most City of London experts expect the upswing to continue - for a while at least.

On Aug. 26 the Financial Times index of 100 leading shares burst through the 3,000 mark. It managed to stay above that all-time peak even after a much-rumored Bundesbank interest rate cut failed to materialize, and the Confederation of British Industry reported that recovery in manufacturing industry appeared to be faltering.

Paul Walton, equity strategist at James Capel, ascribes the buoyancy to a widespread belief that Britain's long slump is over and that interest rates will be brought down to 4.5 percent by year's end. In addition, government predictions of an inflation rate no higher than 4 percent for the foreseeable future are boosting market optimism.

Mr. Walton notes that the London surge is largely due to confidence among small investors that Britain's medium-term economic prospects look better than they have for some years. Economic difficulties in Germany and France help to make Britain's future look all the brighter.

Mutual funds, brokers say, are especially popular with the smaller investor. In the second quarter of this year mutual fund purchases totaled British pounds2.5 billion ($3.76 billion) - four times higher than at the same time in 1992.

Although the trading mood is bouncy - Nomura economists forecast an FT 100 share index at 3,500 by Christmas - the London Stock Exchange, as an institution, is in a difficult period. Problems began with the ``Big Bang'' deregulation of 1986, which spelled an end to the exchange's physical market place.

Foreign securities houses, mainly from the United States and Japan, swept in, cut commission rates, and loosened up the system.

The Stock Exchange hoped to shore up its position by launching the Taurus computerized share-settlement system. But last March Taurus, which cost British pounds450 million to set up, collapsed -

and with it immediate hopes of paperless trading.

The Exchange no longer polices itself: Stock market regulation is in the hands of the Securities and Futures Authority. Even promoting wider share ownership has been turned over to a separate body.

Sir Andrew Hugh Smith, the chairman, says the Stock Exchange in future will ``concentrate wholly on core functions.'' Stripped of some of its historic activities, the 220-year-old institution is no longer the financial force it was.

None of this necessarily means that London is dying as a financial center. Sir Andrew rejects suggestions that Frankfurt or Paris will become Europe's financial capital. Much may depend on finding an early replacement for Taurus. In Frankfurt, settlement takes two days. In London it still takes two weeks.