LSE changes trading rules

By Declan Curry, BBC News 24 Business Presenter

The London Stock Exchange has survived its first day of changes to the share dealing rules, successfully introducing a central counterparty to its transactions.

A spokesman for the exchange said the new technology had not suffered any glitches during the day.

The stock exchange's automated share buying and selling network is now expected to face a rush of new orders, with many of the City's biggest institutions ended their boycott of the SETS trading system.

The big dealers have been coaxed into joining the automated trading network more than three years after it was launched by a key rule change that allows them to keep the details of their share dealing anonymous.

The London Stock Exchange said that it was too early to see whether trading volumes were increasing because of the changed rule.

Spurned system

The SETS electronic order book was launched in October 1997, in an attempt to cope with the surge in share dealing on the London market.

Instead of dealers doing business with each other over the phone, share trading was switched to computers, with buyers automatically linked to sellers, and orders to buy and sell shares displayed on screens.

But that caused many of the big institutions in the City to spurn the new system, because their clients did not want details of their share transactions to be known publicly.

Under the SETS system, their details could be revealed when a share buyer was automatically matched to a seller, and the transaction was confirmed.

The latest rule change, which is effective from Monday morning, will allow the big City firms to keep their clients' details secret.

Instead of dealing directly with another City company, with both firms seeing the full details of the transaction when it is confirmed, share trading orders will instead go through an automated middle-man, the London Clearing House, which will then settle the transaction separately with each company.

That way, Firm A will deal with Firm B, without either finding out each other's details.

SETS now conducts around 30,000 trades on an average day, but has the capability of expanding this to up to one million daily trades.

Price swings

The SETS trading system has also been criticised heavily for producing wild swings in share prices.

Prices quoted on the electronic order book have been distorted by rogue orders, especially at the beginning and the end of each trading day, when there are few orders in the system.

The London Stock Exchange was forced to open its doors half an hour earlier, and start trading at 8am, in an attempt to dampen down the volatility.

The Exchange also had to revise the 1997 closing prices of 11 of the UK's biggest companies because the prices on SETS were wrong.

There had been allegations that bonus-hungry dealers took advantage of thin trading on New Year's Eve in 1997 to distort the stock prices quoted on the electronic trading system and boost their personal performance that year.

But the Stock Exchange denied that there had been any deliberate price fixing.