Business Outlook: Blatant abuse is just the tip of the problem

ORDER-DRIVEN TRADING, the coal industry and zeneca's problems

Experience with the stock exchange's new order driven trading system seems to be going from bad to worse. To begin with, the system seemed open merely to ridicule; now it appears to be open to manipulation and abuse too.

Since the launch of Sets on 20 October, the stock market has been notably more volatile. In part, that is down to more pronounced worldwide volatility in equity markets. However, in Britain the new system has greatly enhanced the problem, creating some local difficulties all of our own.

At first it appeared that the effect of this was just to confuse. Oh, and, of course, to disadvantage the poor old retail investor, but whoever cared about him? This nonetheless might be seen as bad enough. Prices have been yo-yoing about all over the place, and even for big institutional investors, it has become increasingly hard to know what the going price is or ought to be. Now we have growing evidence of much worse - abuse of the system.

Precisely what happened last Friday when the price of some leading pharmaceutical stocks was driven down at the end of the day will have to await the judgement of regulators. However, the suspicion must be that there was a deliberate attempt to influence the closing level of the FTSE 100 index, probably for the purpose of bolstering a separate hedging futures contract. Whatever the details of this particular case, the point is that the new system makes it generally easier to indulge in questionable practice of this type.

The great bulk of orders tend to get withdrawn towards the end of the day, because with increased volatility in world markets, nobody likes to leave them on the system over night, lest they get disadvantaged the next morning. That makes it easy to drive through bargains towards the end of play at silly prices; there's no one around to trade at a more sensible level. The silly price thus becomes the one that gets used to calculate the closing FTSE index.

This type of obvious abuse is only the devious tip of a much wider problem, however. Agency brokers claim that the system is generally open to manipulation by the big market makers, who place and withdraw orders to suit their own books. As a result, only 40 per cent of trades in FTSE 100 stocks are through the new system. The rest go through the old quote driven system. Unfortunately, the old system has ceased to work as it once did, since market makers are no longer obliged to deal at the quoted price, if indeed they are quoting one at all. The market makers have, as a consequence, never had it so good. The rest of us have rarely had it so bad.

At this stage it is not entirely clear what the stock exchange can do about all this. It is no longer possible to pass off these difficulties as mere teething problems. So much has been invested in the new system in terms of ego and money, that abandoning the new and going back to the old would no longer seem an option. It must be possible to make the new system work better than it has, but it is clear the Exchange will have to go much further than the little bit of tweaking here and there it has attempted so far. One thing is certain. Whatever happens, the small retail investor will as always be the loser.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
A picture taken on February 11, 2014 at people walking at sunrise on the Trocadero Esplanade, also known as the Parvis des droits de l'homme (Parvis of Human Rights), in front of the Eiffel Tower in Paris.
techGoogle celebrates Paris's iconic landmark, which opened to the public 126 years ago today
News
Scientists believe Mercury is coated in billions of years’ worth of carbon dust, after being ‘dumped on’ by passing comets
science
News
Cleopatra the tortoise suffers from a painful disease that causes her shell to disintegrate; her new prosthetic one has been custom-made for her using 3D printing technology
newsCleopatra had been suffering from 'pyramiding'
News
people
Arts and Entertainment
Coachella and Lollapalooza festivals have both listed the selfie stick devices as “prohibited items”
music
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sheridan Maine: Accounts Assistant

£30,000 Annual: Sheridan Maine: A fantastic opportunity has arisen for a perso...

Richard Bishop: Accounts Payable Clerk

£11 - £13 Hourly Rate: Richard Bishop: Are you looking for a purchase ledger r...

Jemma Gent: Management Accountant

£250-£300 Day Rate: Jemma Gent: Are you qualified accountant with previous exp...

Richard Bishop: Accounts Payable Clerk

£11 - £13 Hourly Rate: Richard Bishop: Are you looking for a purchase ledger r...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor