Traders suspended in FTSE manipulation allegations

Two traders at the US investment bank JP Morgan have been suspended after allegedly manipulating the FTSE 100. As Lea Paterson explains, Sets, the London Stock Exchange's new order-driven trading system, is at least partly to blame.

The equity options traders are understood to have offered rival traders inducements to act as counter-parties in deals designed to drive down the FTSE 100 late on Friday afternoon. The Stock Exchange is thought to have been warned about these attempts at stock market manipulation, but failed to act until after the deals had been executed.

In the closing moments of trading on Friday, the FTSE fell by more than 30 points after substantial falls in the shares of pharmaceutical giants Glaxo Wellcome and SmithKline Beecham.

JP Morgan yesterday confirmed that it had suspended two employees and added that it did not expect to make further suspensions. It declined to name the two employees involved. The rival investment bank implicated in the deal has not yet been identified.

The two JP Morgan employees are understood to have approached traders from a number of investment banks and offered them financial inducements to enter "rogue" prices for a number of FTSE 100 stocks in the Stock Exchange's new electronic order book.

It is thought that the rogue prices were substantially lower than the prevailing prices for the stock. The traders are then believed to have sold stocks at these "rogue" prices in the closing moments of trade.

This prompted sharp falls in the prices of a number of FTSE 100 stocks, which in turn caused the FTSE 100 index to drop. The two traders are thought to have been trying to drive the index down to hedge a derivatives trade.

The Exchange is thought to have been contacted by one of the organisations approached by the dealers before the trades took place. But the Exchange, which is currently conducting an investigation into the allegations, did not act until after the trades had been executed.

Sets, the new electronic trading system launched by the Stock Exchange in October, facilitated the manipulation of the FTSE 100 index. Late in the afternoon and early in the morning, very few orders are placed on the Exchange's new order book and very few trades are conducted. This so-called lack of liquidity in the new order book at the beginning and the end of the trading day makes it easier for a small number of trades to distort the FTSE 100 index, as happened last week.

The Stock Exchange admitted last week that it was concerned about the lack of liquidity in the order book, which is only used to trade FTSE 100 stocks. It added that it was especially concerned about the unusual closing prices that it had observed for some blue-chip stocks during the weeks since the launch of Sets.

On 20 October, Sets replaced the Exchange's old quote-based system, where market-makers quoted buy and sell prices over the telephone to one another. Under Sets, market-makers type into an electronic order book the number and the price of shares they wish to sell (or buy). The orders then remain on the book until they are matched with an equivalent buy (or sell) order, at which point the trade is executed. Alternatively, market-makers can delete their own buy or sell orders before they are matched with the orders of a counter-party.

The lack of liquidity in the order book at certain times of the trading day is largely due to the reluctance of dealers to leave orders on the book overnight. In the last few minutes of trading, most unexecuted orders are deleted from the book, partly because traders wish to reassess their positions in the morning in the light of overnight news from trade in the Far East.

This widespread deletion of orders means that the few orders left on book early in the morning and late in the afternoon can differ widely from the majority of orders on the book throughout most of the trading day.

Traders dealing early in the morning or late in the evening therefore run the risk of executing trades at grossly unfavourable terms, a risk which last week prompted the Exchange to warn traders to use "limit orders" or price caps.

Over the past few weeks, there has been a number of so-called "rogue" closing prices, caused by dealers executing trades at the unrepresentative buy and sell prices that can prevail on the order book at the beginning and the end of the working day.

Aside from "educating member firms", the Exchange last week ruled out taking concrete steps to resolve the pricing problems before the new year. Changes that have been suggested to deal with early morning illiquidity include moving the trading day back one hour.

It has also been proposed that the Exchange deal with late afternoon illiquidity by calculating "closing" prices before the Exchange's official closing time of 4.30pm or by forcing traders to leave orders on the book overnight.

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to US
PROMOTED VIDEO
Extras
indybest
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidates on the verge of tears as they were ejected from the boardroom
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
ebooksAn unforgettable anthology of contemporary reportage
News
Wilko Johnson is currently on his farewell tour
people
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?