A four-hour outage on the London Stock Exchange (LSE) did not see a significant shift of flow to multilateral trading facilities (MTFs), with many long-only traders preferring to scale back trading activity until the issue was resolved around midday UK time.
“We saw many clients willing to hold off trading their UK orders and wait for the LSE to open,” Toby Bayliss, co-head of European trading at agency broker Sanford C. Bernstein, told theTRADEnews.com. “Vodafone, which can trade hundreds of trades in a minute, was printing just three or four times a minute.”
“We were happy to sit back and wait for a reliable reference price,” added Adrian Fitzpatrick, head of investment dealing at Aegon Asset Management. “If people had to trade, it is likely they put very tight limits on their order and traded in much smaller clips. There was some trading on MTFs, but it is a fraction of what would normally trade.”
According to data from MTF BATS Europe, over €232 million of FTSE 100 shares had been traded on MTFs as of 12.10, with €144 million traded on Chi-X Europe, €51 million on BATS, and €33 million on Turquoise, the LSE-owned MTF. Yesterday, there was a total of €7.75 billion traded in FTSE 100 stocks. In September 2008, the LSE experienced a near full-day shut down, with only low levels of liquidity shifting to Chi-X Europe and the newly-launched Turquoise, then owned by a consortium of brokers.
Today's problems on the LSE's new Millennium Trading platform, which went live on 14 February, started at 08.03 during the opening auction. Trades conducted during the auction were investigated for potential cancellation at 08.24, but were later allowed to stand.
Trading on the LSE's SETS and SETSqx order books was halted at 08.33, due to what the exchange has described as a “real-time data dissemination issue”. The market was cleared of all quotes at 10.19.
The exchange resolved the issue at 11.44, at which time it put markets into a ”pause' phase, which allows members to enter, delete and modify orders. An auction call period took place at 12.15, with continuous trading starting straight after. The LSE does not plan to extend trading hours in light of the incident.
“We sincerely regret the inconvenience that today's disruption to trading has caused our customers,” read a statement from LSE CEO Xavier Rolet. “We have resolved the real time data dissemination issue and our UK cash equity markets have now resumed trading.”
Where possible, brokers adjusted their smart order routers and algorithms to route away from the LSE to allow clients could continue to trade.
“In response, we enacted our primary exchange outage procedures and switched to trading UK stocks on the MTFs only,” said Peter Ward, executive director for J.P. Morgan's electronic trading team. “The key here was to ensure an adequate level of price formation before going ahead with trading on the MTFs. Spreads were wide to start but narrowed to acceptable levels through the first half an hour of trading on more liquid names but continued to be challenged on less liquid names.”
However, the outage meant that some order types that reference the primary market – such as pegged orders – and the dark pools operated by MTFs were not able to operate.
Most dark MTFs use the stock prices on primary markets as a reference price. Chi-X Europe has filed with the European Securities and Markets Authority, the pan-European regulatory body, to use its own data to reference its dark pool, Chi-Delta.
“Many alternative trading instruments and pegged order types on alternative venues continue to reference the LSE price, which prevents their usage during an outage,” said Bayliss. “This will continue to happen unless a standardised alternative or consolidated reference price is utilised.”
According to Fitzpatrick, the lack of any significant activity on MTFs during the outage suggests that the prevalence of high-frequency trading in UK stocks is not necessarily advantageous to traditional buy-side firms. Recent estimates suggest high-frequency trading accounts for around three-quarters of UK equity trading volume.
“High-frequency traders say they supply liquidity to MTFs, but the lack of volume going through now on MTFs is a classic example that shows they do not,” he said. “This suggests to me that they are only there to pick off institutional business and arbitrage against it.”
The outage is the second to hit the LSE Group this week. On 22 February, Borsa Italiana, the Italian stock exchange owned by the LSE Group, suspended trading for six hours following problems with its DDMPlus data dissemination service. Continuous trading did not start on MTA, Borsa Italiana's electronic equities market, until 15.30.