BBC News Online: Business

Sunday, 25 February, 2001, 13:53 GMT City fears computer crash

By Declan Curry, BBC News 24 Business Presenter

Traders are waiting anxiously for the start of trading on Monday, amid fears that new rules for share dealing could overwhelm the City's computerised trading system.

This would lead to long delays in share dealing or even the collapse of the multi-million pound system.

The Stock Exchange's automated share buying and selling network is likely to face a rush of new orders on Monday, as many of the City's biggest institutions are expected to end 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.

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.

A plague of crashes

But if the big City firms start using the SETS trading system from Monday, there are worries that it may not be able to cope with a big increase in orders.

The system has had many embarrassing problems in the past, and the Stock Exchange has been plagued by computer crashes.

To the acute embarrassment of Stock Exchange officials, SETS teetered on the edge of collapse on its first day of operation on 27th October 1997.

The shiny new high-tech system was struggling to cope with the flow of buy and sell instructions just minutes after its official launch by the Chancellor, Gordon Brown.

A few days later, on 5th November 1997, share trading was disrupted for 45 minutes because of a computer crash shortly after the market opened. The Exchange said SETS was not to blame.

And trading in the City was halted for eight hours on the busiest trading day of the year last year after another computer crash.

Share dealing was suspended for all of the morning and most of the afternoon on 5th April 2000, much to the consternation and fury of the financial institutions that were rushing through last-minute orders on the last day of the 2000 tax year.

Late trading

In an unprecedented move, the Stock Exchange stayed open until late in the evening to allow that day's trading to be completed, but around half the trading due to be done that day was lost.

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.

http://news.bbc.co.uk/low/english/business/newsid_1189000/1189294.stm

-- Martin Thompson (mthom1927@aol.com), February 25, 2001