LSE error leaves traders frozen and paralyses market

The markets may be under pressure thanks to the credit crunch, but trading in London descended into farce yesterday afternoon due to something much more mundane – an information technology failure. The problem struck with 40 minutes of trade remaining in the session, leaving traders and investors with frozen screens, static information and bizarre index valuations.

However, there could be serious consequences of yesterday's IT blackout, which in effect ended trading half-an-hour early and meant that investors were unable to execute orders or even accurately price their stocks. As soon as the pricing issues struck, market-makers withdrew their quotes on stocks, refused to buy or sell shares and electronic execution links, known as RSPs and through which the majority of trades are executed, collapsed.

According to a statement released by the exchange, the problems stemmed from its interactive gateway, Infolect, a system that is used to disseminate information to the market rather than a trade execution software issue.

The after-market auction was extended until 6pm in order to allow traders to execute some orders, but with most screens still showing unreliable and seemingly random index levels, many traders declined to take part and left orders on hold.

Although screens showed that the FTSE 100 closed 37.5 better at 6,512.4, at 4.30pm there were only 11 risers among the blue chips, and most of the largest companies were displaying prices firmly in the red. By the time the auction ended, the index was showing a 54.8 point fall to 6,420.1. Two hours later it was revised, to show a 89.8 per cent fall to 6,385.1.

A Stock Exchange spokesperson said: "Trading was extended for as long as necessary to allow those wishing to participate in the auction to complete orders. We will be looking into the issue immediately."

Nick Conyerd, the head of market-making at broker Shore Capital, said that the problem "paralysed the market". He said: "Although this is an exceedingly rare occurrence most investors have taken it in their stride ...it was a very unfortunate time for the markets to effectively close because Wall Street was falling and we were very busy. It could not have happened at a worse time."

Although market makers and traders said that it had been a busy day, volume was not noticeably heavier than it has been at any time in the last month.

The London Stock Exchange extended its opening hours for only the second time since 1993. The last time traders were blacked out of the market was arguably an even more unfortunate piece of timing. In 1999, IT problems closed the Stock Exchange for a full day on 5 April – the last day of the financial year, leaving thousands of investors stranded with unrealised capital gains and uncrystalised losses.