Stock Exchange Notice N55/00
London Stock Exchange
25 October 2000
For the attention of the
chairman/senior partner/compliance officer,
all member firms N55/00
STOCK EXCHANGE NOTICE
CONSULTATION ON TRADING SYSTEM ENHANCEMENTS CLOSING AUCTIONS
CLOSING AUCTIONS
Background
1. Following widespread consultation with market participants, closing
auctions were introduced to order book securities in May 2000. Prior to that
time, SETS closing prices were calculated using the Volume Weighted Average
Price ('VWAP') during the last 10 minutes of continuous trading and, before
December 1998, using the last automatically executed trade. In view of
feedback from market participants in relation to closing prices being
generated at levels unrepresentative of earlier trading, the Exchange has
reviewed the current closing auction mechanism.
2. The current closing auction incorporates a number of safeguards, namely the
Price Monitoring Extension ('PME'), Market Order Extension ('MOE') and volume
check, which are designed to reduce the likelihood of unrepresentative closing
prices being generated. Notwithstanding these safeguards, instances have
occurred where the closing auction has generated unrepresentative closing
prices.
3. This Notice describes a proposed enhancement to the closing auction
mechanism, which is designed to allow market participants more time to respond
to potential price movements and consequently is expected to reduce the number
of unrepresentative closing prices. The Exchange's Domestic and International
Rules Committee, which comprises practitioners representing a cross-section of
market participants, has endorsed the proposal which has also been supported
by other market users in separate discussions.
Proposed Enhancement
4. In order to increase the effectiveness of the existing safeguards, the
Exchange proposes to introduce an additional extension period, to be known as
an Additional Price Monitoring Extension ('APME'). This 10 minute extension
will be triggered whenever, following a Price Monitoring Extension, the
indicative auction price of a security remains 5 per cent or more away from
its reference price (VWAP or last Automatic Trade).
5. During the APME, market participants can enter and delete market orders and
limit orders but no execution will take place. This means that market
participants will have up to a total of 15 1/2 minutes, following the auction
call period, to react to potentially unrepresentative prices.
6. In the event that an APME is triggered, it will always be the last
extension period to operate, regardless of whether an MOE is generated after a
PME. There will continue to be only one volume check. This will operate
following the last extension period, whenever the indicative auction price of
a security remains 5 per cent or more away from the reference price. The
parameters for the volume check will remain the same.
7. An analysis of closing prices between 30 May and 24 October 2000 indicates
that the APME would have operated on 46 occasions (approximately 0.3% of total
closing auctions) during this period, 13 of which related to FTSE 100
securities.
8. It is not proposed to alter the duration of the auction call period, or to
amend the operation of the existing extension periods (PME and MOE). In most
cases, these safeguards are considered to operate effectively in filtering out
potentially unrepresentative closing prices.
Notification to the Market
9. Whenever an extension period is triggered, the Exchange currently alerts
the market automatically via LMIL. The Exchange has initiated discussions
with information vendors, who are considering enhancements to their visual
displays to increase visibility to market participants of those securities
subject to an extension.
10. In addition, the Exchange will publish details of those securities which
enter an APME, via its Regulatory News Service.
Consultation
11. In order to implement any changes by early December 2000, comments are
requested to be provided by close of business on 7 November 2000 to:
Mathew Wootton
Head of Regulatory Development
London Stock Exchange
Old Broad Street
London
EC2N 1HP
Telephone 020 7797 1570 (STX 31570)
Email: mwootton@londonstockexhange.com
12. The Exchange will keep under review the operation of the closing auction
to ensure that it meets the requirements of its member firms and other
customers.
Andrew McStravick
Head of Market Operations
This Stock Exchange Notice will be available on the website at
www.londonstockexchange.com/regulation/notices/
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