'Double witching' sends market haywire on busiest trading day ever

The FTSE 100 was sent swinging wildly yesterday morning when Stock Exchange computers were swamped by derivatives traders looking to cash in bets on the UK market.

The surge of activity caused chaos, overwhelming many systems, and sent the index of leading shares up 250 points in a few minutes, before it came crashing back down more than 300 points. It eventually settled up 46.6 at 3,860.1.

It was the busiest day's trading ever in London, with 5.3 billion shares changing hand, 1.2 billion of them within the space of 20 minutes yesterday morning, when a futures contract on the FTSE 100 expired.

The period between 10.10am and 10.30am is known, and feared, as the "double witching", taking place every three months. Private investors are routinely advised to steer clear of the market on such days, and brokers expect volatility, but yesterday's swings were the wildest in memory.

At various points during the frenzy, Barclays shares were up 38 per cent, Tesco was up 30 per cent, and Schroders was up 24 per cent.

Stories swept the City of investment banks who made or lost tens of millions of pounds in the space of a few moments. CSFB was said by most dealers to have been particularly active, as were Merrill Lynch and Deutsche Bank. The worst hit trading desks could have lost up to £100m, according to some estimates.

The FTSE 100 futures contract which expired yesterday had been trading on Liffe, the derivatives exchange, for months. Buyers of the contract had paid a price that reflected the level of the FTSE 100 at the time of purchase. Theywin or lose according to the difference between the purchase price and the expiry price. The expiry price is calculated by the average level of the index in the 20 minutes before 10.30am.

Most of yesterday's trading in the FTSE 100 shares was done by aribtrageurs at investment banks and hedge funds. They exploited small differences in the price of the futures contract and the real index at a number of points over the past few volatile weeks, expecting to make a profit when the two converged.

Many had sold real shares that they needed to buy back before 10.30am. The London Stock Exchange was warned on Thursday that several big trading desks would need to carry out huge trades in the minutes leading up to the expiry.

The Exchange said none of the trades would be cancelled, that it was happy it had presided over an orderly market, and that all trades were carried out efficiently by its computers.

However, it did respond to criticism from some dealers, who found trading screens not able to give up-to-date information. Chris Broad, head of broker services, said it would launch an investigation into the systems used by information re-sellers.

Mr Broad said: "We know, because we are religious about this, that our information systems were, at worst, 200 seconds slow. Not every trader gets its information direct from us but by other routes."

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