Electronic trades soar as profit margins fall for stock exchange

The number of electronic trades on the London Stock Exchange has soared during July, with a total of 12.2 million trades carried out on SETS during the month, a 96% increase on the same month period last year.

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The number of electronic trades on the London Stock Exchange has soared during July, with a total of 12.2 million trades carried out on SETS during the month, a 96% increase on the same month period last year.

The average daily number of trades on SETS, the exchange's electronic order book trading service for securities, was up 87% on last year to 551,447. The average daily value also grew 69% year on year to £8.7bn.

The introduction of TradElect in June, the Exchange’s new technology platform, has driven the popularity of SETS. Nine out of 20 of the busiest trading days have taken place since the introduction of TradElect.

"The improved latency and expanded capacity of TradElect has enable member firms to increase their use of SETS during the recent market turbulence," said the London Stock Exchange (LSE) in a statement.

A cut in trading tariffs of about 10%, which began in April, has also spurred this increased trading activity on SETS, according to an LSE spokesperson.

In January, the exchange announced two new trading tariffs for the financial year. Amongst the changes was a decrease in the SETS Exchange charge for trades and the introduction of ‘SETS Internaliser’, a lower tariff to encourage firms to move internalised trades – normally conducted within firms - onto the exchange. System internalisation is when a firm executes orders from its clients against its own book or against orders from other clients, rather than through an exchange.

An LSE spokesperson said, "The strategy with our pricing has been to bring down the price of trades. The increase in volume compensates for the lower yield. With our electronic trading platform, the capacity is higher and speeds are faster. Improvements in technology has gone hand in hand with our pricing approach."

But the LSE has advised that profit margins from trading has fallen to less than £1 per bargain, from an average of £1.36 at the end of last year. However, SETS trading volume has surpassed 1m bargains on three days in August, more than twice the average daily trading volume the LSE had hoped to achieve by the end of March 2008. This means that profits are likely to be higher overall, said the LSE spokesperson.

The LSE has been under pressure to reduce tariffs, and faces new competition following the introduction of the EU's Markets in Financial Instruments Directive – or MiFID in November. MiFID will remove concentration laws. Seven investment firms - the exchange's largest customers - have plans to launch their own trading system, known as Turquoise, which is expected to compete with domestic exchanges.

Yet the LSE spokesperson downplayed the impact of increased competition as a result of MiFID. "We've always had competition in the UK. MiFID will change things in the UK far less than the rest of Europe. We've always had system internalisation here. In order to win business, the LSE has provided a better service than elsewhere."

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