LSE stops trading for more than 3 hours

LONDON (Reuters) - The London Stock Exchange (LSE.L) halted trading for more than three hours on Thursday because of technical glitches, while it placed all order-driven securities in an auction call period.

Trading resumed at 1400 GMT, following an auction call period that started shortly after 1030 GMT.

"Our decision was a result of customer feedback," said an LSE spokesman. "Some customers were experiencing connection issues while others were not, and customers requested for the market to be put into auction status so that there would be a level playing field."

But Chi-X Europe, the LSE's leading rival, said the exchange's decision to put its market into auction status prevented the routing of trades to other venues.

"The auction status hampered investors' ability to trade by not enabling participants to seek a reference price on another venue," the multilateral trading facility (MTF) said in a statement.

Chi-X said the LSE should have halted trading, as it did on November 9 during a partial system failure, because that would have allowed firms' trading systems to switch to other venues.

The LSE spokesman denied the Chi-X claim.

The auction process "had the effect of halting trading but allowed clients to continue to interact with orders on the system," the LSE said in a later statement.

An investor was critical of the way LSE, Chi-X and many brokerage firms handled the breakdown.

"The LSE should have had an auction process for a half-hour, not more than three hours," said Adrian Fitzpatrick, European head of centralized dealing for Aegon Asset Management.

He said that while Chi-X had a point, they and the brokers should have developed contingency plans to handle such a situation.

SMART ORDER ROUTING NEEDED

"In the U.S. this doesn't happen, because you have smart order routing, and it (trading) would automatically move to the MTFs that would be generating prices," Fitzpatrick said.

In Europe, at least a few brokers were able to switch off their connection to the exchange, but a lot of brokers do not have genuine smart order routing that allows such a switch, he said.

In September last year the LSE suffered its worst systems failure in eight years, causing the share market to suspend trading for about seven hours, infuriating its users.

One London fund manager said the LSE breakdown came at yet another inconvenient time, when the market was stirred by the Dubai debt crisis.

LSE Chief Executive Xavier Rolet said, "We are working hard to ensure this doesn't happen again ahead of switching (to a new trading platform next year)."

A system breakdown can be a very bad event for the LSE "in the current market environment where there is so much competition and the LSE is trying to win back institutional customers," said Axel Pierron, a senior analyst at Celent.

"It could push market participants who didn't have access to other liquidity pools such as Chi-X or Turquoise to show them that they need a back-up solution," he added.

But that is not what happened on Thursday, said Fitzpatrick, who predicted that volume of trading would be tiny for the day.

"For the MTFs, it should have been manna from heaven, but they have all struggled today to make a price," he said.

"The only way you could do it is by looking at comparable stocks in Europe, put a limit order on and put it in a couple of dark pools and hope you start getting ticked off (trades executed)," he added.

Pierron said it would be interesting to see how much volume on Thursday went to regulated MTFs and how much to the unregulated over-the-counter side.

Chi-X called on the LSE to close the market when failures occur in future to allow trading to continue.

"To a certain extent it is fair for Chi-X to complain about the situation, and one can imagine that they will eventually benefit from it," Pierron said.

But "issuers come into play as well, and some of them could be concerned if the LSE closed its market that Chi-X would become the relevant trading venue for their issue," he added.

(With additional reporting by Daisy Ku, editing by Will Waterman)