Stock Market Week: Rogue trades have had their final day
Monday 14 December 1998
More than a year after Chancellor Gordon Brown switched on what was to be a highly controversial method of share trading, the Stock Exchange has introduced a system that should iron out the impact of maverick deals.
An impressive regulatory system has been established to counter rogue trades. But they have a habit of occurring towards the stock market close with a consequent disruptive impact on the final and most important Footsie calculation of the day.
Any distortion is usually of relatively minor significance although the 100 Footsie constituents are all traded on the order book. On the only publicly declared occasion when Footsie was recalculated, observers were surprised by the gap that emerged.
The revision occurred on New Year's Eve, a vital day in the investment calendar as it is the cut off date for many portfolio valuations.
Then, a closing 1.5 points gain was adjusted to a 3.2 plus and 11 Footsie constituents had their closing prices revised. Perhaps not an alarming change but big enough to have had a considerable impact in the rarefied world of investment performance.
On a share-by-share basis the new system should end fiascos of the type when two late trades one Friday in July created consternation at Smiths Industries, the aerospace to medical group. The deals, at 711p, were accepted as the closing price; they compared with the more than 750p ruling for much of the day.
On another occasion three Footsie constituents were the subjects of late trades utterly out of line with reality.
There is a suspicion that some trades are deliberately inputted incorrectly to try to establish a favourable position. Other daft deals have been put down to spaghetti-fingered traders. On one occasion one trader actually confused two shares, punching a Cable & Wireless price onto the Imperial Chemical Industries screen. The deal was subsequently cancelled.
However, it is claimed that most of the seemingly daft deals are the fag ends of multi-million pound portfolio trades; the final, often small deal in a string of trades when the price is of little significance to the whole exercise. Derivative-related basket trades, arbitrage and hedging are regarded as the sort of activities responsible for most maverick trades.
Until today the last order book trade represented the basis of a Footsie calculation. Now the new closing price will be an average based on order book deals in the last 10 minutes of trading. The so-called Volume-Weighted Average Price will be the result of dividing the value of trades by the volume. If there are no late transactions the last order book trade will be used as the closing price. Under the new system the Smith Industries closing price would have been 752.75p not 711p.
Off order book trades involving market makers, which are still a large slice of daily business, will continue to be excluded from providing any influence on the blue chip index.
Footsie, in its final week labouring under the old system, had a poor time despite a half-a-percentage point base rate cut and yet another mega deal. It retreated 40.2 points to 5,541.7 and will need a Christmas rally of titanic proportions to achieve some of the heady year-end forecasts which once floated around.
In the Christmas run up there will not be a compelling spread of company results to offer much cheer.
This week the only Footsie constituents in sight are Asda, the superstores chain, and Securicor, the security and mobile phone group.
Judging from the way Asda shares have performed, its interim results will sadly lack any suggestion of festive glow. There is little doubt with consumer spending under pressure Asda, like other retailers, is feeling the pinch and its management, which so successfully rescued the business in the early 1990s, faces its most difficult year.
The shares, down to 23p when Tory bigwig Archie Norman launched the revival, hit 218p in April. Last week they closed at 143.5p.
Profits of around pounds 200m, up from pounds 190m, seem likely but the stock market will be more interested in any clues it is able to get about current trading, particularly the Christmas experience.
Two other hard pressed retailers are on the results schedule. Carpetright and MFI will have particularly woeful tales to tell.
Both have felt the spending slow down. Carpetright is likely to suffer a half-time fall from pounds 16.1m to pounds 12m and MFI, which has suffered the indignity of being expelled from the mid-cap index, could even slip into the red.
Forecasts range from a pounds 6m profit to a pounds 10m loss. Last year the furniture group produced a pounds 35.4m profit.
Securicor's year's profit could emerge at around pounds 100m against pounds 69m. The group's minority shareholding in the Cellnet mobile phone group continues to intrigue with many observers convinced the day is nearing when the controlling shareholder BT buys out the Securicor involvement.
Others reporting include Vaux, the Sunderland group planning to unload its two breweries and 350 bottom-of-the-barrel pubs to concentrate on its hotels and top of the range pubs. Its year's profits should emerge at pounds 42m against pounds 38.3m.
NFC, the transport group which stems from the famous National Freight Corporation management and worker buy-out, has found the going tough lately but should achieve an 8 per cent year's gain to pounds 125m. First Choice Holidays, the packaged holidays group, should manage pounds 48m against pounds 15m.
Leeds, a textile group, also features this week. It has the somewhat dubious distinction of sporting a 17.5 per cent historic yield, despite the promise of a maintained dividend. Although profits are expected to be lower, say around pounds 6m against pounds 8.7m, there is even thought to be a good chance the dividend will be increased from last year's 7p a share total. The shares closed at 51p Friday.
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