UK market rocked by crash (but this time it's virtual)

A computer failure paralysed share dealing on the London Stock Exchange yesterday on what should have been one of the busiest days of the year.

The shutdown cost big investment houses millions of pounds in lost commission and raises questions about the LSE's leadership under Clara Furse at a time when it is facing increasing competition from rival exchanges.

Traders deplored the lack of any back-up system. One said: "The fact that it happened beggars belief."

The LSE refused to say what caused the problem. It blamed what it called "connectivity issues" but declined to elaborate.

Dealers believe its computer systems simply failed to cope with a surge of business. Driven by sharp rises in bank shares after the US government bail-out of the mortgage giants Fannie May and Freddie Mac, the FTSE 100 soared 199.5 points, or 3.8 per cent, to 5440.2, before freezing there at 9.17am, although trading had already come to a halt. Double the normal amount of shares were dealt.

The timing could not be worse for the LSE, which is facing increasing competition on a number of fronts. One rival, Turquoise, backed by nine major investment banks, went live last week, while other trading platforms are due to be launched soon.

James Hughes, market analyst at CMC Markets, said some transactions had taken place between institutions but lack of any central data meant they were "trading blind".

One dealer said: "This is just an appalling shambles." Another firm which would normally have handled 4,000 to 10,000 trades by early afternoon had completed just 300.

Dealings resumed at 4pm but by then many dealers had gone home. Orders placed by large institutions and frozen in the system were settled using the LSE's auction process, with the FTSE 100 closing at 5,446.3, but dealers estimate the amount of business lost during the shutdown was huge. Small brokers offering an execution or dealing only service will have been badly hurt.

Peter Randall, chief executive of rival system Chi-X, said: "There must be a lot of very unhappy investment banks out there. I think all the confusion has actually led to reduced trading by other platforms."

Duncan Higgins, a spokesman for Turquoise, said: "Our trading system is actively working and UK stocks are actively trading."

David Buik of BGC Partners said: "Traders across Europe are incandescent with rage in being unable to execute the orders which they gave to the LSE in good faith around 8.30am."

He added: "I cannot understand why the LSE system is not run in duplicate. So many clients rely on the LSE's durability. They cannot afford to be let down."

The Johannesburg exchange, which uses London's electric trading platform, also went down.

There was speculation that the LSE had asked its IT specialists at the weekend to sharpen up the systems for what was anticipated would be a busier than normal trading session yesterday. To add to her embarrassment a letter from Ms Furse in the Financial Times yesterday said new trading platforms should "test the attractiveness of our service but we do not view this with trepidation".

LSE has cut its commission rates, but the absence of any large takeover activity or new issues has seen its share price come back sharply.

The previous major computer failure was on the last day of the tax year in April 2000, when private client brokers had geared up to place a flood of orders for investors seeking to crystallise capitals gains taxes or losses.