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EDITIONS
Saturday, 30 October, 1999, 12:55 GMT 13:55 UK
London Stock Exchange
A decade ago, a Big Bang transformed the way shares are traded in London - and the revolution continues.

In 1986, London became one of the first financial centres to see trading move out of the pits, off the market floor and on to the telephone.

This was achieved by using a screen-based electronic bulletin board known as Seaq (Stock Exchange Automated Quotations system).

Trading is quote-driven: market makers 'quote' a share price, effectively competing with each other to display the best prices.

Sets - the latest phase

On October 27, 1997 the London Stock Exchange completed its electronic revolution in trading when it replaced the Seaq system with Sets - Stock Exchange Electronic Trading - for the top 100 shares.

Sets's electronic order book means trades are conducted less and less by telephone.

Instead, orders to buy and sell shares are displayed and matched on a computer screen. This is designed to give a better picture of what is happening in the market.

The order book applies to companies in the FTSE 100 index, because it is regarded as being particularly efficient for shares that are actively traded.

Once the new system has been reviewed and proved to be successful, it may be extended to the next 250 companies on the shares index.

The Stock Exchange introduced Sets to tackle the the huge volumes of business.

Over the longer term, the move is expected to lead to lower trading costs and a higher volume of trades.

Sets and the private investor

The order book is designed not to affect the way private investors buy and sell shares.

You can still deal through a broker and either seek advice or ask them to execute an order for you.

How traders earn their share

Under the quote-driven system, market makers buy shares for a lower price than they sell them.

The difference between "buy" and "sell" prices is known as the "spread".

With Sets, an order-driven system, there is no market maker acting as the "middle man" to set prices so the spread becomes narrower.

The problems

Confusion arises over the way prices are quoted for shares traded on Sets.

Shares traded outside the Sets system continue to be quoted in the traditional way - as a theoretical mid price between buy and sell trades.

But the Stock Exchange recommends that prices quoted for Sets traded shares should represent the last trade executed which can be well outside the normal buy and sell range.

Closing prices quoted in newspapers and on television sometimes bear little relation to the prices at which investors can trade.

Sets has also led to volatility, especially at the beginning and end of trading before and after the bulk of orders are carried out.

At these times, the overall picture can be clouded by "rogue" prices.

The Stock Exchange is currently considering ways of "fine tuning" the system. Options include opening the Sets market later and using a final auction to determine closing prices.

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