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.

PROMOTED VIDEO
News
people
Arts and Entertainment
A still from the Jurassic World trailer
film

Video: The official full-length trailer for the Jurassic Park sequel has dropped – two days early

Environment
The plant ‘Nepenthes zygon’ was donated to Kew in 2004
environment
Arts and Entertainment
booksPhotographer snapped celebrities for 40 years - but it wasn’t all fun and games
News
i100
Sport
Aguero - who single-handedly has kept City's Champions League dreams alive - celebrates his dramatic late winner
footballManchester City 3 Bayern Munich 2: Argentine's late hat-rick sees home side snatch vital victory
News
ebooksNow available in paperback
News
peopleSinger tells The Independent what life is like in rehab in an exclusive video interview
News
Muhammad Ali pictured in better health in 2006
peopleBut he has enjoyed publicity from his alleged near-death experience
Arts and Entertainment
Tony breaks into Ian Garrett's yacht and makes a shocking discovery
TVReview: Revelations continue to make this drama a tough watch
News
news
News
The assumption that women are not as competent in leadership positions as men are leads to increased stress in the workplace
science... and it's down to gender stereotypes
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

Citifocus Ltd: Product Development - Asset Management

£Attractive: Citifocus Ltd: High calibre individual with significant product d...

Citifocus Ltd: Credit Ratings - Banking Sector

£Negotiable: Citifocus Ltd: Leading global bank seeks experienced credit analy...

Citifocus Ltd: Economic Crime Investigation & Analysis

£Attractive Package: Citifocus Ltd: High calibre individual with a high degree...

Citifocus Ltd: Snr Risk Analyst - Capital & Liquidity

£Attractive: Citifocus Ltd: High calibre individual with superior academics an...

Day In a Page

Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?
Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

24-Hour party person

Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
Michelle Obama's school dinners: America’s children have a message for the First Lady

A taste for rebellion

US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
Colouring books for adults: How the French are going crazy for Crayolas

Colouring books for adults

How the French are going crazy for Crayolas
Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

What would you do as a local politician faced with an impossible choice of cuts?

Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

Call me Ed Mozart

Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
10 best stocking fillers for foodies

Festive treats: 10 best stocking fillers for foodies

From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
Phil Hughes head injury: He had one weakness – it has come back to haunt him

Phil Hughes had one weakness – it has come back to haunt him

Prolific opener had world at his feet until Harmison and Flintoff bounced him
'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

'I am a paedophile'

Is our approach to sex offenders helping to create more victims?
How bad do you have to be to lose a Home Office contract?

How bad do you have to be to lose a Home Office contract?

Serco given Yarl’s Wood immigration contract despite ‘vast failings’
Green Party on the march in Bristol: From a lost deposit to victory

From a lost deposit to victory

Green Party on the march in Bristol
Putting the grot right into Santa's grotto

Winter blunderlands

Putting the grot into grotto
'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

'It just came to us, why not do it naked?'

London's first nude free runner captured in breathtaking images across capital