LSE

Rivals failed to gain when the LSE went down

by Simon Keane

It looks like Monday’s London Stock Exchange (LSE) outage was down to a technical glitch rather than a capacity issue. This suggests the long-term ramifications should be limited, while the failure of rival platforms Chi-X and Turquoise to take volumes from their wounded rival is a hidden boon.

Market commentators initially blamed Monday’s shutdown on surging volumes following news the US Treasury had rescued Freddie Mac and Fannie Mae. At the time Shares was going to press the LSE had not produced an official statement explaining the cause of the outage but had denied it was capacity-related.

Even after a recovery from July’s 12-month low of 657p, LSE shares, at 800p, are still 60% down from January’s £19.79 peak. Much of this decline is due to fears about the competitive threat from rival platforms. The inability of Chi-X and Turquoise to capitalise on Monday should prompt a reassessment of the threat.

Analysts at Bernstein Research are waiting on an official statement from the exchange before advising clients on what action to take. But if the problem is confirmed as unrelated to capacity Dirk Hoffmann-Becking says the final outcome will be positive: ‘Probably the threats to the exchange are somewhat less than people think.’

Experience suggests the LSE’s TradElect electronic trading platform can cope with the kind of surge seen on Monday, which did not look like beating the previous busiest-ever single day’s trading – on 22 January this year after the US Federal Reserve’s emergency 75-basis-point cut in interest rates.

There were 229,563 trades on Monday worth £4.2 billion compared with 1.4 million trades worth £18.4 billion on 22 January. Since dealing is concentrated in the opening and closing hours and when the US market is open in the afternoon, Monday’s volumes and values do not appear unprecedented. Chi-X’s trading values were actually down on Monday at €3.5 billion versus €5.4 billion on the Friday. Turquoise declined to comment on reports it attracted very small volumes.

Shares says: This proves that without the LSE there is no price formation, the competitive threat is marginal and the shares are due another re-rating. Buy