Stock Exchange stamps on 'snake in the grass' traders

The Stock Exchange made final adjustments to its order-driven share trading system yesterday in preparation for Monday's launch. Tom Stevenson, financial editor, assesses the changes introduced after the mixed success of the system's dress rehearsals.

The Stock Exchange took a decisive step yesterday to ensure there is an orderly market when order-driven trading transforms share dealing in the City on Monday. It said it would change the rules in a bid to stamp out so-called "snake in the grass" traders who have caused havoc in test runs of the new automated system by deliberately inputting orders at ridiculous prices.

A snake in the grass trade works by inputting a buy order for a stock at a very low price in the hope that a rival firm will make an error and accidentally input a matching sell order. The computer automatically deals when buy and sell orders match, regardless of how close to the prevailing market price the orders are.

In an attempt to counter that threat, the Stock Exchange said yesterday it would "treat as a potential regulatory abuse" the entry of an order that was more than 20 per cent away from the current market price unless it was entered with the prior approval of the Exchange.

Gavin Casey, the Exchange's chief executive, also moved to ease concerns that keyboard errors could lead to firms being exposed to much larger transactions than they expected. Starting on Monday, the order book will only accept orders for 10 times the normal market size for any given share.

Mr Casey said the potential risk to member firms of putting in enormous orders by, for example, slipping in an extra '0' far outweighed those occasions when a firm would want to input a very large order. He added that the limit was only an interim measure and said it would be kept under review.

The Exchange also warned yesterday of the dangers posed to firms of using "at best" trades where orders are placed with no restriction on the execution price that would be acceptable. It said firms should use "limit orders" to avoid having a trade executed at a disadvantageous price, even if it steered clear of a snake in the grass.

Yesterday's adjustments marked the final changes to the Stock Exchange's SETS order-driven trading system, which from next week will offer an alternative to the quote-driven telephone-based system in force since Big Bang in 1986 did away with floor trading. Initially it will only apply to the FTSE 100 index of leading stocks, but there are plans to roll it out to the next 250 shares as soon as possible.

All eyes will focus on the success of the automated trading project, which has tied 200 firms directly into the Stock Exchange and represents the biggest change to the way shares are traded in 11 years. The credibility of the Stock Exchange, tarnished by previous failures such as the ill- fated Taurus computer system, hangs in the balance.