Stock Exchange forced to defend closing auction procedure

The London Stock Exchange last night defended its new closing auction process, whereby outstanding buy and sellorders are settled after the market closes. The process has thrown up a string of rogue prices and sparked a chorus of criticism from market players in recent weeks.

The London Stock Exchange last night defended its new closing auction process, whereby outstanding buy and sellorders are settled after the market closes. The process has thrown up a string of rogue prices and sparked a chorus of criticism from market players in recent weeks.

In the latest incident, Smith & Nephew, the mid-cap health conglomerate, appeared to lose more than a third of its market value yesterday - but only because its closing price on Monday was hugely inflated in the final-minute auction. On Monday, Smith & Nephew jumped 60 per cent to 386p in the auction. Yesterday it was back down at 252.5p.

Technical analysts, who divine market trends largely by monitoring closing prices, are warning that the distortions could make day-to-day comparisons meaningless. Richard Crossley of Teather & Greenwood said: "Smith & Nephew was the best-performing stock in the UK on Monday, thereby making the health sector the best performing sector. Neither was the case. A couple of minor cases of this have come about in the last month or so, but Monday was serious, and if it were to continue would cause major problems."

The Smith & Nephew movement was the result of a single fund manager using Monday's auction to reshuffle a portfolio of 90 stocks. Because he was determined to increase his weighting in Smith & Nephew, the manager did not specify a price beyond which he would not buy. Sell orders at prices way above the stock's all-time high, which had appeared hopelessly unrealistic minutes earlier, were fulfilled.

The auction process was introduced two months ago to bring the exchange into line with European bourses. It aims to match up the day's outstanding buy and sell orders by calculating a price that will satisfy as many orders as possible.

The Stock Exchange admitted last night that it has had to nullify a number of trades that went through at wild prices in recent weeks. It said it would aim to educate brokers rather than revise the system.