Exchange tells brokers to use limit orders to avoid pricing snags

The London Stock Exchange yesterday advised stockbrokers to introduce controls - so-called "limit orders" - to protect clients against "unusual price movements" caused by SETS, its new electronic trading system.

In a letter sent to all its member firms, the Exchange warned that it was important for brokers and clients to understand the pricing problems, which tend to occur at the beginning and the end of the trading day.

Martin Wheatley, head of market development at the Exchange, said dealers should move to protect clients by using limit orders, which set parameters outside which a stock cannot be traded.

The Exchange acknowledged yesterday that a key problem with SETS is that at certain times of the day the spread - or the difference between a stock's buy and sell price - is extremely wide. There has been concern in recent weeks that investors trading at these times could lose out. Investors using "execution-only" stockbrokers, which are prohibited from giving advice, and those buying or selling "at best", the best price available, are particularly at risk. These investors could be unwittingly trading when spreads are wide, and receiving unfavourable prices.

SETS' pricing difficulties are caused by illiquidity, or a relatively low amount of stock market activity, at certain points of the day. The problems tend to be most marked in the first 45 minutes and the last 15 minutes of the trading day, according to figures released by the Stock Exchange yesterday.

Aside from "educating member firms", the Exchange is not yet taking concrete steps to solve the pricing problems. Mr Wheatley yesterday ruled out any structural changes at least until the New Year. He said: "It is too early to start thinking about major steps". C

Changes that have been suggested include moving the trading day back one hour, a move that Mr Wheatley said he had not completely ruled out, forcing major institutions, many of which do not start trading until 10am, to trade earlier in the day, and calculating closing prices before the Exchange's official closing time of 4.30pm.