The latest outage at the London Stock Exchange (LSE) on 26 November did not see a mass shift of trading in UK stocks to alternative trading venues, with market participants torn between trading on multilateral trading facilities (MTFs) and waiting for the resumption of the primary market.
The exchange was forced to suspend trading for three-and-a-half hours yesterday because of connectivity problems. All FTSE 100 and FTSE 250 stocks were placed into an auction-call period from 10.30 until 14.00, allowing members to amend or delete orders that were entered prior to being disconnected. The market was back up and running by 14.00.
Despite the outage, the LSE accounted for 60% of trading volume in FTSE 100 stocks, compared to 56% on 25 November, according to data vendor Thomson Reuters. Chi-X Europe accounted for 22% of FTSE 100 trading, compared to 25% in the previous day’s trading, while fellow MTFs BATS Europe and Turquoise accounted for 6% and 5% of FTSE 100 trading respectively.
The US Thanksgiving holiday was expected to result in a decline in trading volume across Europe. However, concerns over Dubai’s financial situation – following government-backed Dubai World’s request for a postponement of debt repayments –caused trading volumes across Europe to increase to 105% of the previous 20 days moving average, compared to an expected 70%, according to figures from Nomura.
Chi-X Europe, a pan-European MTF, said that placing stocks into auction mode was not in the best interests of market participants. “The auction status hampered investors’ ability to trade by not enabling participants to seek a reference price on another venue,” read the statement.
A spokesperson from the London Stock Exchange dismissed the Chi-X claims. “We put the market into auction after close consultation with our members in order to maintain an orderly market,” said the spokesperson.
According to some brokers, market participants whose orders are directed to market via sophisticated smart order routing (SOR) technology would have been able to trade on MTFs regardless of the manner in which the LSE handled the outage.
“Less dynamic trading engines could have been confused by the implied market phase,” Adam Toms, managing director, head of market access group, Nomura, told theTRADEnews.com. “You would hope the banks have the capabilities to deal with any kind of outage by now. We offered clients the opportunity to continue trading UK stocks on MTFs via our SmartDMA product during the outage.”
Trading techniques that rely on a primary exchange reference price, such as pegged orders or dark pools that use the reference price waiver under MiFID, are impacted regardless of whether the LSE is in auction mode or activity is suspended completely. But some market participants also suggest that the lack of volume migrating to MTFs during this most recent outage reflects an unwillingness to trade without the primary market.
“In our opinion, the market hasn’t quite got to the point where people are comfortable trading without a primary, even though they are comfortable putting a significant amount of volume through MTFs under normal circumstances” commented Brian Schwieger, director of EMEA execution services, head of algorithmic execution, Bank of America Merrill Lynch. “As the market continues to mature, I think it will be a different story if the same situation were to arise this time next year.”
“We didn’t trade on alternative venues in UK stocks during the three-and-a-half hours of the outage,” said Mark Winter, senior equity dealer, Scottish Widows Investment Partnership (London). “Like the LSE outage last September, it has been proved that without the benchmarking and price discovery the primary market provides, people are unwilling to trade solely on alternative venues.”
The glitch was the second suffered by the LSE this month. On 9 November, a twelfth of all instruments on the LSE were unavailable for trading from 15.04 until the close of trading. In both the November 2009 outages, trading in UK stocks did continue on MTFs, albeit at lower levels than normal. Chi-X Europe’s market share of trading in UK FTSE 100 index stocks fell to 21.4% on 9 November from 24.7% on the previous Friday, according to Thomson Reuters, while the LSE’s FTSE 100 share increased to 59.9% on 9 November from 55.8% on 6 November. Chi-X Europe reported that around 40% of its members continued to trade in 9 November. Both latest outages stand in contrast to the full-day outage experienced by the LSE on 8 September 2008, when trading in UK stocks effectively ground to a halt.
The LSE plans to switch to a trading system next year supplied by MillenniumIT, a Sri Lanka-based technology firm the exchange bought earlier this year.
“The current TradElect platform was designed nearly six years ago when the trading environment was very different,” said the LSE’s spokesperson. “We are looking forward to moving over to MillenniumIT’s high performance platform next year.”