Traders 'panic' as LSE hit by double whammy

London Stock Exchange goes down in midst of sell-off sparked by Dubai

The London markets were gripped by fear yesterday, plunging by 3 per cent in the wake of news that Dubai World was struggling with its debts. The falls were compounded as the stock exchange suffered an embarrassing systems failure that left traders "twiddling their thumbs" and unable to trade for more than three hours.

The FTSE 100 suffered the worst one-day fall since the end of March, after the state-owned Dubai group called for a standstill on its debts until May. London's blue-chip index spiralled lower following the news, ending 3.2 per cent down at 5,194.1 points as ratings agencies downgraded several of Dubai's firms, raising concerns over the state of the emirate's economy.

Banking stocks were particularly hard hit as the market feared they could suffer from their exposure to Dubai. The biggest faller on the FTSE 100 was Barclays, down 8 per cent to 291.1p, despite insiders saying the group's exposure wasn't significant to affect its forecasts. It was followed by Royal Bank of Scotland, which lost 7.8 per cent to 32.9p. Lloyds said yesterday it had a "modest" exposure to Dubai World.

Shares in the London Stock Exchange itself fell as rumours that the liquidity crisis would force Borse Dubai to sell out its 20.5 per cent stake in the company. Sources close to the group wrote off the talk as "pure extrapolation", but the stock still closed down 7.3 per cent to 754.5p.

The fears of a potential fire sale of the group's UK assets sent sterling down 2 cents against the dollar. Meanwhile, in the credit default swap (CDS) market – essentially the cost of insuring bonds and a good indicator of how risky the market sees them – Dubai's five-year CDS hit three-month highs.

David Jones, chief market strategist at spread-betting group IG Index, said: "The news from Dubai caused panic throughout trading in London. The market had been chugging along nicely for the past six months, now this. A lot of people are worried that it is a precursor for more bad news."

There was no help from Wall Street, which was closed for Thanksgiving. "This was unfortunate, as there was no chance of the Americans riding to the rescue," Mr Jones said. Dubai's markets were also closed for Eid.

He added: "The outage at the LSE massively added to the confusion. It gave people more time to digest the news. When the market reopened it just tanked." The LSE was left with egg on its face just a day after bragging about the strength of its technology systems. A little after 9.30am, traders started experiencing problems connecting to the exchange's electronic order book to carry out their trades. A source close to the LSE likened the issue over its trading gateways to a "dodgy mobile-phone signal". Several firms' connections to the order book were repeatedly cutting in and out."

The problem, which had started with a few clients, quickly spread and the exchange was forced to put the London market into auction at 10.33am. During that time, traders could input or amend trades, but they could not be executed. One trader at a City stockbroker said: "This is a joke." Manoj Ladwa, a senior trader at ETX Capital, said: "As far as glitches go, the London Stock Exchange couldn't have picked a worse day," as all traders could do was "twiddle their thumbs".

The LSE restarted normal trading at 2pm after fixing the glitches. The outage was the worst hit to its systems since October 2008, when it went down for about seven hours. Xavier Rolet, the LSE's chief executive, said he "regretted the disruption". "Having resolved the immediate issue, we are working hard to ensure this doesn't happen again," he said.