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LSE’s Technology Woes May Prove Beneficial for Competitors

10 September 2008 - Markets - Editor

Recent rumblings of concern with regard to the increase in algorithmic, or black-box, trading, as well as stock exchanges becoming too reliant on technology, may very well be valid when considering the computer malfunction on Monday at the London Stock Exchange. Certainly, this could not have come at a worse time for the world’s third largest exchange. News of the U.S. federal government take-over of mortgage giants Fannie Mae and Freddie Mac triggered a flurry of activity in world-wide markets resulting in one of the biggest market rallies in the past five months – and LSE investors and dealers stood by helplessly, like a penniless child looking through a candy store window.

The healthy gains that were being enjoyed by London’s FTSE 100 Index at open of trade came to an abrupt halt at about 9 am on Monday, with the exchange only reopening at 4 pm, just in time to close again for the day. What makes the breakdown in technology even more embarrassing is that it follows hot on the heels of a letter by LSE head, Dame Clara Furse, published in the Financial Times, wherein she confidently promotes the advanced technology of the high-profile exchange.

Yesterday the London Stock Exchange launched an urgent investigation into what caused the almost seven hour hiatus, with the objective of ensuring that it never happens again. Undoubtedly, Monday’s fiasco would want to be avoided at any costs. The situation has been described by dealers as “an absolute disaster”. Frozen screens, which remained frozen, resulted in increasing stress levels as the day wore on. Eventually dealers drifted off to local pubs and coffee bars, seemingly resigning themselves to the fact that Monday was a write-off.

Speculation is rife that the LSE’s computer systems may not have been able to handle the dramatically increased level of trade that occurred on Monday. No doubt the investigation will reveal whether that was the case, but the fact remains that it was a major setback for the exchange which normally trades shares to the value of around £8 billion on a daily basis. Experts estimate that only half of that value was traded on Monday, with more than 350 million shares changing hands before 9 am, leaving traders fuming over what they may have achieved had the day continued as it should have.

Rival electronic trading platforms, such as Chi-X and Turquoise, and other stock exchanges on both sides of the Atlantic, carried on with business as usual on Monday, highlighting the fact that the LSE is facing increasing competition, which will likely benefit from their misfortune. Chief executive of broker TD Waterhouse, Angus Rigby, estimated that they lost business running into six-figures because of the shutdown at the LSE. While expressing his relief that everything was back to normal at the LSE on Tuesday, he is quoted as saying that “the reality is that anyone who was thinking of using other exchanges, that is a path they will now have to consider a bit more.”

 


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