Teething problems with Sets - the London Stock Exchange's order-driven, electronic trading system
They should have known from the start. As Gordon Brown, the UK's chancellor of the exchequer, officially opened the London Stock Exchange's electronic order book last October, the prices on the screen turned red behind him. The red signalled falling prices attributable to uncertainty over the UK's policy on the euro. Still, it wasn't the launch image the LSE would have liked. Indeed, the new trading system's image has been largely in freefall ever since.
The Stock Exchange Electronic Trading Service - or Sets - was originally billed as a vital step in the evolution of the London markets. The first stage saw some of the trading of FTSE 100 companies move onto the system with the rest of the market due to follow. This was the beginning of the end of London's market-making system. Gavin Casey, chief executive of the LSE, went so far as to say: 'By lowering costs and increasing transparency, speed and efficiency, it will make London an even more attractive and competitive place in which to do business.'
Crystal clear
Not according to those who have had to use it over the past few months. Initial concerns over lack of liquidity and volatility (particularly at the opening and close of the market) were crystallized when two JP Morgan traders engineered a collapse in the FTSE 100 at the end of trading one day last year. Since then there have been many reports of hiccups in the market and unwary fingers being burnt by rogue prices.
Last month's Reuters survey of UK larger company investment research, sales and trading confirms the problems. Tempest Consultants found some 83 percent of institutional traders thought Sets provided worse liquidity than before. And a staggering 89 percent thought it was slower. Other complaints abound: spreads have widened, closing prices are distorted, too low a percentage of trades are being processed through the Sets system. The really strange prices appearing on the system are largely being blamed on either human error or traders chancing their arm for a match - snakes in the grass as they have been termed.
Wild prices they may be, but they can't half cause some problems if they hit a match at the wrong time. Just ask BP. Late trading on the day the Reuters survey was published saw BP's shares jump 48p to 960p. The following day it fell back to 920p. And, of course, that volatility had a real effect on the FTSE 100. Peter Hall, investor relations manager at BP, notes that the company has voiced its concern to the exchange, adding: 'It's not in anyone's interest to see a big distortion in prices. Anything that throws up uncertainty doesn't help those wanting to deal in the market.' Hall points out that if the company had been trying to determine the strike price for a scrip issue while such a blip had occurred it could have been costly.
Other FTSE 100 companies share similar concerns over Sets as it currently stands. Joseph Cantie, director of investor relations at LucasVarity, sums up the thoughts of many. 'It's not good. There's not enough people using it and too large an amount traded off it. The quoting between bid and ask is very erratic particularly in the morning. Generally, it's been a real struggle with the exchange getting up to speed. But they obviously know they've got a problem and time will probably heal many issues. At the moment it is a concern to us as long as it remains a concern to investors.'
Shake off
The LSE is trying to shake off criticism that it has let the problems drift too long. It has for instance already instituted a cut-out whereby prices 20 percent outside the norm will be questioned. And it's collating responses to its public consultation and expects to make recommendations in June. 'As soon as we can,' stresses a spokesman. Shortening the trading day is one option, but that's faced opposition from those who fear a reduction in the time when both London and New York are open.
The exchange admits to teething problems. 'It's probably a combination of things,' says the spokesman. He believes there was some in-built resistance to change with people saying they weren't going onto the order book until it was more liquid. 'People are now getting more used to the style of trading on an order book. The machine doesn't make up the prices - they have to be input and then hit by someone else.'
Companies outside the FTSE 100 had better hope people get more used to an order book more quickly or that the exchange's recommendations hit the right spot. Extension to the FTSE 250 is the likely next stage and, if there were liquidity problems with the FTSE 100, you ain't seen nothing yet.