Rulebook
All London Stock Exchange member firms are bound by the Rules of the London Stock Exchange (“the rules”) and must ensure compliance with these rules. The rules were fully updated in 2007 in readiness for the introduction of the Markets in Financial Instruments Directive (“MiFID”or “the Directive”). The revised Rulebook also aligned the rules more closely with the structure of the trading system and simplified them where possible to make them more user-friendly.
The Rules are therefore closely linked to the operation of the trading system and should be read in conjunction with the Guide to the trading system and the Millenium Exchange and TRADEcho Parameters.
The Rules of the London Stock Exchange incorporate a set of defined terms. These are typically used to ensure rules are kept concise and to standardised commonly referenced terms and subjects. Most rules will reference at least one defined term, each identified by bold text. Hence to ensure full understanding of any particular rule will require a cross reference with the definitions section at the beginning of the Rulebook.
For example Rule 1100 states "A member firm may act as, or use the services of, a settlement agent to settle on Exchange business" and the following definitions apply:
| Member firm | a partnership, corporation, legal entity or sole practitioner admitted to Exchange membership and whose membership has not been terminated. For the purposes of the compliance procedures, member firm shall include a former member firm where appropriate |
| Settlement agent | a person providing settlement services |
| on Exchange | a trade executed under the Rules of the Exchange as defined by rules 2000 & 3000 |
It should be noted that the definition itself may contain defined terms which would also need to be crossed referenced within the definitions.
The definitions are contained at the start of the Rule book and are available from the downloads below.
The latest version of the Guide to the Trading System - MIT201 and Millennium Exchange Business Parameters are available on the Trading services page.
The core rules apply, with some exceptions, to all member firms and include categories of membership, authorisation, general suitability and other general requirements such as notifications and trade records.
The core rules are divided into a number of sections including:
- Member firms;
- Member firm services;
- Compliance and enforcement;
- Charges and fees;
- General conduct; and
- Systems and trading.
The general conduct rules cover misleading acts, conduct and prohibited practices, share price manipulation, and system testing.
System and trading rules cover member firm system problems, regulatory suspensions, market situations, when issued dealing, and conditional trades.
Order book trading rules
The order book trading rules are aligned closely with the operation and system rules of the trading system. In general the order book trading rules are high level and reference the trading system and parameters where applicable.
They are designed to be resilient to system configuration changes at segment and sector level within the trading system.
The rules primarily cover how member firms access the trading system and the responsibilities of member firms for their order management. These include order routing and member authorised connections. They also cover contra requests and the reversal of erroneous trades.
Off order book trading rules
The off order book trading rules are less reliant on the system rules of the trading system and govern how member firms must interact when trading on Exchange away from the order book.
This section of the rules is more extensive than the order book trading rules and covers subjects such as the determination of an on Exchange trade, trade reporting, trade publication, and obligations of member firms to market makers.
The market making rules are related to both off order book trading and to order book trading. A member firm can elect to register as a market maker in one or more securities but must be able to meet the obligations that are associated with the role. A basic requirement is for a market maker to make prices and deal either on the order book, off the order book or both.
The trading system's functionality determines some of the minimum requirements for a market maker, such as the minimum size of the quote. The rules make reference to the parameters where applicable.
The market maker rules cover the following topics:
- Registration;
- Obligations of market makers in order driven securities;
- Exceptions to obligations of market makers in order driven securities;
- Obligations of market makers in quote driven securities;
- Exceptions to obligations of market makers in order driven securities;
- Interaction with a market maker in quote driven securities;
- Market making agreements - algorithmic trading; and
- Market making schemes - algorithmic trading.
Forms and agreements
Below you will find a number of forms commonly used by member firms for regulatory purposes. You can download, print, complete and return forms to the relevant Exchange departments.
For use by applicant and member firms in order to confirm to the London Stock Exchange their settlement arrangements with third party providers. Firms should complete one or both depending on the settlement arrangements in place. Each declaration must be fully completed and signed by both the firm and its settlement provider.
Buying-in
A firm admitted to membership of the London Stock Exchange (“the Exchange”) may request the enforced purchase of securities on behalf of another Exchange member, in accordance with paragraphs 5070 to 5083 of the Rules of the London Stock Exchange, in order to facilitate the settlement of a transaction executed on Exchange.
The following pages outline the timetables that are applicable according to the type of security concerned setting out the earliest time that a buying member firm (“requesting party”) may initiate the buying-in process to enforce delivery of securities. They also sets out the charges that will be incurred by the ultimate selling member firm (“liable party”) which has failed to deliver within these time frames.
Where a transaction was not undertaken with a central counter party the requesting party is required to attempt to resolve the unsettled trade directly with its counter party. It is required to notify its counter party prior to instigating the buying-in procedure.
In certain situations the Exchange will be unable to complete the buying-in process. Examples include:
- Where the liable party is not a member of the Exchange;
- Where an attempt to buy-in by the Exchange would have a significant market impact;
- Where the Exchange is unable to source the security concerned;
- Gilt-edged securities.
The buying-in process is initiated by the requesting party submitting a request directly by e-mail to the Exchange. For enquiries, please contact Post Trade Monitoring on +44 (0) 20 7797 1116.
Member Firms may find this is the most convenient for CREST settled transactions and are required to set up a dedicated e-mail address for receiving notifications of processed requests by the Exchange. The Exchange should be advised immediately if this e-mail address changes.
The form below can be downloaded and completed electronically and should be e-mailed to buying-in@londonstockexchange.com
Where the transaction was executed on SETS with the central counterparty the requesting party should record LCH01 as the liable party.
The requesting party should submit the request in accordance with the timetables set out in the "Buying-in timetables" page. The Exchange will then issue the liable party with a “Buying-in Notice” by e-mail in accordance with the applicable timetable. Prior notice to the liable party by the Exchange will not be given where buying-in is to take place immediately.
The timetable set out in the "Buying-in timetables" page indicates when the Exchange will make the first attempt to buy in. If this is unsuccessful then it shows when a second attempt will be made. It also gives details of when matching and settlement must take place. Where a security changes timetables, for example, following a transformation as a result of a corporate action, the shortest timetable will be applicable.
Where the trade was executed with a central counterparty the “Buying-in Notice” will not identify the ultimate requesting party.
It is the responsibility of the requesting party to ensure that it provides full information in connection with the buying-in request submitted to the Exchange. The Exchange is not liable for any errors or omissions in the connection with information it receives.
a) All eligible trades dealt for guaranteed delivery
| Function | Timetable |
|---|---|
| Earliest request for buying-in | Intended Settlement Date + 1 |
| Method of request submission | According to security |
| Notice issued (NI) | Date of request if received by 16:00 London time |
| Buying-in (BI) | NI |
| 2nd attempt | BI + 1 |
| Matching of buying-in transaction | T + 1 |
| Settlement of buying-in transaction | T + 3 (T + 4 for residual transactions) |
b) SETS securities
| Function | Timetable |
|---|---|
| Earliest request for buying-in | Intended Settlement Date + 5 |
| Method of request submission | Manual form |
| Notice issued (NI) | Date of request if received by 16:00 London time |
| Buying-in (BI) | NI + 6 |
| 2nd attempt | BI + 5 |
| Matching of buying-in transaction | T + 1 |
| Settlement of buying-in transaction | T + 3 (T + 4 for residual transactions) |
c) Other eligible securities not included in a) and b) above
| Function | Timetable |
|---|---|
| Earliest request for buying-in | Intended Settlement Date + 45 |
| Method of request submission | Manual form |
| Notice issued (NI) | Date of request if received by 16:00 London time |
| Buying-in (BI) | NI + 6 |
| 2nd attempt | BI + 5 |
| Matching of buying-in transaction | T + 1 |
| Settlement of buying-in transaction | T + 3 (T + 4 for residual transactions) |
d) IOB Securities
| Function | Timetable |
|---|---|
| Earliest request for buying-in | Intended Settlement Date +30 |
| Method of request submission | Manual form |
| Notice issued (NI) | Date of request if received by 16:00 London time |
| Buying-in (BI) | NI + 6 |
| 2nd attempt | BI + 5 |
| Matching of buying-in transaction | T + 1 |
| Settlement of buying-in transaction | T + 3 (T + 4 for residual transactions) |
e) Order book for Retail Bonds
| Function | Timetable |
|---|---|
| Earliest request for buying-in | Intended Settlement Date + 5 |
| Method of request submission | Manual form |
| Notice issued (NI) | Date of request if received by 16:00 London time |
| Buying-in (BI) | NI + 6 |
| 2nd attempt | BI + 5 |
| Matching of buying-in transaction | T + 1 |
| Settlement of buying-in transaction | T + 3 |
Any buying-in request submitted after the time indicated in the "Buying-in timetables" page will be treated as having being received the following business day in that security.
The liable party will incur a charge as soon as the buying-in Notice is issued. The actual amount is set in accordance with the scale of charges detailed on the "Buying-in Charges" page.
Where the requesting party wishes to withdraw or amend its buying-in request, as a result of settling an outstanding transaction or reaching agreement with the liable party not to proceed to buying-in, it should do so by sending an instruction to the Exchange.
The requesting party cannot withdraw a buying-in request in respect of a CCP transaction, although in this instance only, it will not be required to accept delivery where settlement of the transaction in respect of which it had previously issued the buying-in request has already occurred.
An instruction from the requesting party to withdraw a buying-in request will be accepted by the Exchange at any time in the period between the actual submission of the relevant buying-in request and the timetabled day for buying-in.
Default information
Where the Exchange declares a member firm to be a defaulter, under the Rules of the London Stock Exchange, this page provides a link to additional information for member firms and market participants.
There is currently one member firm in default:
The following information is provided for member firms and non-member firms to assist their queries in relation to the default of SVS Securities Plc ("SVS") which was declared at 15:30 on Friday 9 August 2019. The Exchange will update this information from time to time.
All Stock Exchange Notices issued in relation to the default of SVS are available from the downloads section at the bottom of this page.
Administrator information – Julien Irving, Andrew Poxon and Alex Cadwallader of Leonard Curtis are Joint Special Administrators to SVS Securities Plc.
Here is a link to their website which provides information in relation to the administration of SVS:
https://www.leonardcurtis.co.uk/svs/
Default Procedures
The Exchange has confirmed that the majority of SVS's unsettled on Exchange trades were dealt in an agency capacity, however, there are a small number of trades dealt in a principal capacity.
The operation of the Exchange's default procedures for on Exchange unsettled agency trades removes the defaulting firm from the settlement process, therefore allowing settlement of the unsettled trade to take place between the defaulter’s end customer and the counter party member firm.
The Exchange will provide details of the defaulter’s customer to the non-defaulting counter party who shall write to that customer in a form prescribed by the Exchange requiring them to settle the contract.
The operation of the Exchange's default procedures for unsettled on Exchange principal trades, in accordance with the provisions of the Companies Act 1989, are designed to produce a net sum calculation of the liabilities owed to and by the defaulter with respect to each of its counter parties. Under the Rules of the London Stock Exchange the Exchange will determine the net amount payable between SVS and each of its counter parties in respect of unsettled on Exchange trades as at the time of default (15:30 hrs on Friday 9 August 2019).
In accordance with paragraph D146 of the rules, this net amount will be certified by the Exchange and may be proved as a debt by the defaulter or counter party as applicable. Following this certification, it is for the defaulter and its counter parties to organise the associated payments. The Exchange is not authorised to engage in the payment process and its role in the default will cease once it certifies the net amount payable.
N10/19 - Declaration of Default - SVS Securities Plc
N12/19 - SVS Securities Plc - In Default - additional hammer prices
N13/19 - SVS Securities Plc - In Default - additional hammer price
Current status
The default of SVS Securities Plc has now been closed. The Default Completion Report has been submitted to the Financial Conduct Authority.
SVS Securities Plc Default Completion Report
Rules
The default procedures are covered in paragraphs D010 - D200 of the Rules of the London Stock Exchange. Only transactions effected on the Exchange ("Stock Exchange market contracts") will be subject to the default rules.
Rules of the London Stock Exchange
Ceasing settlement
CREST
Settlement in CREST for SVS Securities Plc has been disabled for all trades that were/are due to settle.
Member firms
This guidance is for member firm counterparties who believe they have an unsettled on Exchange transaction with SVS Securities Plc ("SVS").
Any member firm which believes it was counterparty to any on Exchange unsettled, non-central counterparty transactions with SVS must notify the details to the Exchange as soon as possible. Member firms are requested to complete and return a spreadsheet setting out the full details of these transactions.
It is important for member firms to make the Exchange aware of these transactions. The law provides that the Exchange’s Default Rules take precedence over the insolvency rules applied by SVS's administrators.
Member Firm Counterparty details - instructions
Member firms that believe that they are a counterparty to any unsettled on Exchange transactions where SVS is a counterparty, should complete the excel spreadsheet in the downloads below and return this to defaultofficial@lseg.com
Each member firm's Member ID should be included against each trade and also in the name of the spreadsheet returned to the Exchange.
Unsettled SVS securities PLC trades - Member firms
Non members
This guidance is applicable to non member clients, counterparties and their custodians who have unsettled on Exchange transactions with SVS Securities Plc (“SVS”).
Transactions subject to Default rules
Transactions executed away from the Exchange's order books must be trade reported to the Exchange as in accordance with rules 3000 and 3010. In the case of a SVS trade with a non member counterparty, SVS would have needed to trade report that transaction to the Exchange.
If a non member counterparty had a standing instruction with SVS that it wanted all of its transactions to be subject to the rules, or that it gave similar instructions on a trade by trade basis, then it is likely that SVS would have reported it to the Exchange.
Reconciliation
The Exchange’s ability to reconcile non member unsettled market contracts relies heavily on submissions made by non members to the Exchange identifying such transactions.
To assist in the reconciliation of any unsettled market contracts, non members who believe they have unsettled on Exchange market contracts with SVS are requested to complete the excel spreadsheet in the downloads below and return this to defaultofficial@lseg.com
Unsettled SVS securities Plc trades - Non members
Hammer prices
For those trades where SVS Securities Plc ("SVS") traded in a principal capacity the Exchange will apply the provisions of the default rules applicable to unsettled relevant principal contracts in accordance with rules D120 - D146 of the Rules of the London Stock Exchange. See below for full details of this process.
Hammer Price spreadsheets are available from the downloads below.
Unsettled Relevant Principal Contracts
The Exchange will determine the final cash settlement payable between the two counterparties involved in each transaction. This is based on the difference between the original trade price and the Exchange’s middle price (“the hammer price”) of the relevant securities immediately prior to the time at which the default was declared, namely at 15:30 on Friday 9 August 2019.
In accordance with Rules D141 and D142:
If the hammer price exceeds the contract price:
-
If the contract was a purchase by the defaulter the defaulter is entitled to receive the excess from the counterparty
-
If the contract was a sale by the defaulter the defaulter is obliged to pay the excess to the counterparty
If the hammer price falls short of the contract price:
-
If the contract was a purchase by the defaulter the defaulter is obliged to pay the shortfall to the counterparty
-
If the contract was a sale by the defaulter the defaulter is entitled to receive the shortfall from the counterparty
If hammer price is equal to the contract price:
-
Zero position – nothing owed between counterparty and defaulter
Publication by the Exchange of a hammer price in any particular security should not be interpreted to mean that the Exchange accepts that these are unsettled on Exchange market contracts in any such security. The Exchange's reconciliation process is intended to identify the unsettled market contracts that are on Exchange.
Additional Hammer Prices
We have a Hammer Price list (dated and version controlled) on a dedicated website page. If necessary, additional security hammer prices will be added to an updated list (with a new version number) and highlighted in red text. The Exchange will communicate that an updated version of the list is available to market counterparties via a Stock Exchange Notice with a link to the site.
Objection to Hammer Prices
Under Rule D132 a member firm may object to a hammer price in writing (email will suffice) within five business days of the date of notification (ie: when the given hammer price first appeared on the Exchange’s list). Any dispute will be determined in accordance with Rule D132 and the determination will be final and binding on all concerned. In making any objection, the member firm should state why it does not believe the stated hammer price reflects the Exchange’s middle market price of the security as at 15:30 on Friday 9 August 2019, when the default was declared.
Rate of Exchange for Net Sums Due under Default Procedures
Under Rule D120 the Exchange will calculate the net amount due between SVS and its counterparties where they were party to unsettled, non-CCP trades undertaken on the Exchange in currencies other than Sterling.
In accordance with Rule D144, for the purpose of discharging the amounts calculated in respect of such trades, the Exchange will aggregate all the relevant amounts which are in the same currency, creating a "currency aggregate". This is to allow the Exchange to certify a single net amount to be paid by SVS to its counterparty or by the counterparty to SVS, as appropriate.
Hammer prices - SVS Securities Plc V1 09-08-19
Hammer prices - SVS Securities Plc V2 20-09-19
Hammer prices - SVS Securities Plc V3 15-10-19
Contact details
Default Official - Liam Smith
Email: defaultofficial@lseg.com
Deputy Default Official - Dagmar Banton
Phone: + 44 20 7797 1210 (STX 31210)
Email: dbanton@lseg.com
When issued dealing and stabilisation
When Issued Dealing is a period of conditional dealing with deferred settlement. When Issued Dealing typically takes place in securities which are due to be listed or admitted to trading on one of the Exchange’s markets. Trades during the When Issued period, are conditional on the security being listed or admitted to trading and can only settle once trading has become unconditional. Where the security is not listed or admitted to trading, all transactions effected during the period of When Issued dealing are void.
As required in accordance with Rule 1535 of the rules of the London Stock Exchange a member firm intending to act as or on behalf of a stabilising manager in a security to be traded on Exchange shall, prior to the commencement of the stabilising period provide the Exchange with information regarding the stabilisation.
The information listed below should be provided to the Admissions Team (admissions@lseg.com) and disclosed via an announcement through a Financial Conduct Authority approved Regulatory Information Service:
- The security to be stabilised, and any associated securities being stabilised;
- The stabilising manager and contact;
- The stabilisation period;
- The issue price of the security, unless the security is an investment falling within paragraph 12 or 13 of Schedule 2 to FSMA; and
- Any related over-allotment (or Green Shoe) options.
The Exchange acknowledges that there will be occasions when the issue price will not be known on the day before the commencement of the stabilising period. Therefore, a member firm shall notify the Exchange of the issue price as soon as it is finally determined.
A member firm shall also notify the Exchange if the stabilising period is to change.
Making a complaint
These content detail how to make a complaint to the Exchange, what we can and cannot do, some common causes of complaint, and where these should be addressed. Finally, they explain how to take your complaint further if you are not satisfied with the Exchange's response.
The London Stock Exchange is the organisation which provides the principal markets for the issue of, and the buying and selling of, publicly quoted shares in the UK. It brings companies and investors together, provides rules to ensure the markets work efficiently and fairly, and monitors the operation of its markets to ensure that its rules are being obeyed. The Exchange also provides markets in corporate loan stocks, Government (gilt-edged) securities and international securities.
Companies whose shares are traded on the Exchange are known, in general, as "quoted companies" and may be admitted to the main market of "listed" shares and other securities, or to AIM (the Alternative Investment Market). Listed securities are those which have been admitted to the Official List by the UK Listing Authority (now a division of the Financial Conduct Authority). Stockbroking firms and other securities houses, if they are "members" of the Exchange may trade directly in shares and securities on the Exchange, on behalf of their clients. The Exchange makes sure that its quoted companies and firms which are members comply with the Admission and Disclosure Standards or the Rules of the London Stock Exchange, as appropriate.
The Admission and Disclosure Standards cover the admission to trading of listed shares and securities, and companies' ongoing disclosure standards towards their shareholders. Companies whose shares are traded on AIM are covered separately by the AIM Rules. The Rules of the London Stock Exchange cover the way shares are traded on the Exchange's markets by firms which are members.
These pages outline the role of the Exchange and provide guidance on those issues which fall to the Exchange to regulate, and those which may be appropriate for consideration by other regulatory or dispute resolution organisations. They detail how to make a complaint to the Exchange, what we can and cannot do, some common causes of complaint, and where these should be addressed. Finally, they explain how to take your complaint further if you are not satisfied with the Exchange's response.
The legislation which now governs the conduct of investment business in the UK is the Financial Services and Markets Act 2000 (FSMA) which came into force on 1 December 2001, superseding the Financial Services Act 1986. The statutory body with overall responsibility for enforcing the legislation relating to investment business under the FSMA is the Financial Conduct Authority (FCA). The Exchange is a Recognised Investment Exchange within the terms of the FSMA and is regulated directly by the FCA.
With the implementation of the FSMA, all the previous dispute resolution schemes for investment business, banking services, and insurance were amalgamated into a unified scheme, the Financial Ombudsman Service (FOS) which, although set up under the FSMA legislation, is independent of the FCA.
With minor exceptions (see footnote to this page), each firm which carries out investment business must be authorised to do so by the FCA. Such firms include stockbroking and other member firms of the Exchange, investment and fund management companies, insurance companies and pension providers, independent financial advisers, solicitors, accountants and actuaries carrying out investment business (but see below).
As from May 2000, the function of the UK Listing Authority (UKLA) was transferred from the London Stock Exchange to become a division of the Financial Services Authority (now the FCA).
The interests of shareholders during takeovers fall under the remit of the Panel on Takeovers and Mergers, a non-statutory body independent of the Exchange and the UKLA.
Footnote- the exceptions refer to firms of solicitors, accountants and actuaries which have elected not to be authorised for investment business by the FCA. The business carried out by such firms is restricted in scope and must be incidental or purely complementary to the professional services provided by the firm. Such firms are not directly regulated by the FCA, but by the relevant Designated Professional Body (Law Society or Institute/Association of Chartered Accountants or the Institute of Actuaries). These Designated Professional Bodies are themselves in turn accountable to the FCA in relation to the investment business carried out by the firms they regulate.
If you believe that a quoted company or a firm which is a member of the Exchange may have broken the Admission and Disclosure Standards or the Rules of the London Stock Exchange, we may be able to handle your complaint.
If your complaint relates to a dispute between you and a company or a securities firm, you should attempt in the first instance to settle the dispute directly. In the case of a quoted company the appropriate contact for correspondence is the Company Secretary. In the case of a firm it is the Compliance Officer. Every firm authorised to carry out investment business must have at least one designated Compliance Officer.
If you have a complaint which you wish to address to the London Stock Exchange, you should put your complaint in writing, including copies of relevant documents and giving as much detail as possible on what has happened. Your complaint should be addressed to:
Regulatory Complaints
UK Regulation
London Stock Exchange
10 Paternoster Square
London EC4M 7LS
We aim in general to provide a full response to your complaint within 15 working days of receiving it. However, if we anticipate that it may take longer to respond to your complaint, for example because we need to request information from another party, we may send you an acknowledgement/progress letter pending the eventual substantive response. If we are unable to help, we will provide you with an explanation.
As a result of your complaint, we may start disciplinary proceedings against a firm or quoted company. Obligations of confidentiality normally prevent us from publicising the existence, progress or outcome of regulatory matters including investigations by the Exchange or other regulatory bodies into potential rule breaches or criminal offences. Only if a decision is taken to impose a penalty and to publicise that penalty can the Exchange notify you.
We may not be able to help you if...
- your complaint is about events which are more than three years old. This is because, under our rules, firms which are members of the Exchange are not required to keep transaction records for more than three years. We are therefore normally unable to investigate events which occurred before that time
- your complaint is subject to litigation or is pending before the courts.
Also, please remember that we cannot investigate any complaint which is outside the scope of the Rules of the London Stock Exchange or of the Admission and Disclosure Standards. In particular, this includes the provision of investment advice, terms of takeover offers, and any complaint you may have about the commercial management of a quoted company.
If we believe that the complaint should be handled by another regulatory or dispute resolution body, we will send it to the appropriate body and let you know that we are doing so.
Exchange delivery settlement price (EDSP) intraday
The Exchange Delivery Settlement Price (“EDSP”) for FTSE 100 and 250 Index Futures and Options Contracts (“the Contracts”) is based on the Index value created by the intra-day auction in each of the constituent securities which is run specifically for that purpose by the London Stock Exchange.
These index expiries occur:
- On the third Friday of every month for the FTSE 100 Index Options.
- On the third Friday of every quarter (March, June, September and December) for the FTSE 100 and FTSE 250 Index Futures.
On the relevant day the auction call in each security starts at 10:10am. Uncrossing is scheduled to take place from 10.15am (a random start time of up to 30 seconds is applied). For the duration of the EDSP intra-day auction continuous electronic trading is suspended in the securities concerned.
The prime purpose of the auction is to concentrate liquidity in the constituent securities and establish a price for ICE Futures Europe's expiring index contracts. ICE Futures Europe declares the final settlement price (the EDSP) against which all outstanding open positions in that delivery/expiry month are settled.
The current EDSP intra-day auction follows the same functionality as the London Stock Exchange’s daily closing auction process with the variation that tighter price monitoring parameters are applied.
A single 2 minute market order extension is invoked if the auction matching process would result in market orders remaining unexecuted on the order book.
If the uncrossing price of a security is calculated to be more than a pre-determined percentage away from the security’s previous electronic execution value, a 5 minute price monitoring extension will occur. The relevant thresholds for a specific trading sector can be found in the “Sector Breakdown” worksheet of the Millennium Exchange Business Parameters document, which is available as a download on the Trading Services page of the website.
The EDSP intra-day auction price monitoring percentages are currently set as:
- 1% for constituents of the FTSE 100 making up approximately 75% of its weighting; and
- 3% for the remaining FTSE 100 constituents and all securities making up the FTSE 250.
It is possible for up to 1 market order and 2 price monitoring extensions to be invoked at security level during an EDSP intra-day auction. Each extension is followed by a random period of up to 30 seconds. During the EDSP intra-day auction (including any extension period) participants can enter or delete limit, iceberg, hidden and market orders.
It should be noted that following the maximum number of permitted price monitoring extensions, the balance of orders may result in the uncrossing price being further away from the previous electronic execution value than the relevant percentage trigger level (i.e. the level at which the price monitoring extension was triggered).
FTSE International Limited (“FTSE”) calculates and disseminates indicative real time index values during the EDSP intra-day auction period until such time that all the securities have uncrossed.
Further details on auction processes can be viewed in the Guide to the trading system available as a download on the trading services page.
Each security’s EDSP uncrossing value is set as the single price that leads to the greatest number of shares to be executed. In the case where a security does not have a crossed book and no auction execution takes place, the latter of the last automatic trade price prior to 10:10 or where there is no automatic trade price, the previous day’s closing price will be used as the final EDSP value for that security.
All member firms must observe the standard of conduct required under Rules 1400 and 1410 when entering orders during auctions. In particular, member firms should refer to:
- the supplementary guidance to Rule 1400 under the heading “Entry and deletion of orders”; and
- the supplementary guidance to Rule 1410 under the heading “Additional guidance for closing auctions”, which applies equally to intraday expiry auctions. Member firms trading during index expiry auctions are reminded that they should have regard to the impact their order entry may have on the market and should consider the timing of orders entered and deleted to allow other member firms sufficient time to react to these changes.
Member firms offsetting derivative positions are reminded to ensure order entry is completed in a timely fashion, having regard to the impact on the market so as to allow other member firms to react to these orders, as per the Exchange’s guidance to Rule 1410.
London Stock Exchange Guidance
You can find below London Stock Exchange plc’s latest Brexit guidance to support market participants’ planning. The UK formally withdrew from the European Union on 31 January 2020 and the agreement governing this withdrawal introduced a transition period that is due to end on 31 December 2020. As we approach this date, London Stock Exchange updated this Assessment again on 18 December 2020 to support contingency planning.
Market Matters
The London Stock Exchange has in the past issued a number of Compliance Updates. These took the form of newsletters containing brief, specific articles/commentary intended to assist compliance officers and other personnel who have responsibility for their member firm’s compliance with the Rules of the London Stock Exchange. Announcements about the publication of new Compliance Updates were emailed to individuals who had registered to receive such notifications via the Exchange’s website.
In June 2016, the Exchange replaced ‘Compliance Update’ with ‘Market Matters’, moving from a newsletter to the online publication of individual articles on a dedicated webpage. Market Matters articles do not constitute formal exchange guidance; this is communicated via Stock Exchange Notices and/or incorporated within the rules. Market Matters articles are intended to give examples of the kind of behaviour the Exchange is focusing on from a regulatory perspective; outline the lessons to be learned from market events or from Exchange disciplinary action; and provide commentary on various aspects of compliance with Exchange rules and related matters.
Member firms with queries regarding the Rules, Stock Exchange Notices or Market Matters should contact the Rules & Compliance team on +44 (0)20 7797 2190 or STX 32190.
Disclaimer
Market Matters articles will not constitute formal Exchange guidance; this will continue to be communicated via Stock Exchange Notices and/or incorporated within the Rules. Market Matters articles are intended to give examples of the kind of behaviour that the Exchange is focusing on from a regulatory perspective; outline the lessons to be learned from market events or from Exchange disciplinary action; and provide commentary on various aspects of compliance with the Rules and related matters.
However, the messages communicated in Market Matters should be noted by member firms as the fact that updates and reminders have been published on certain topics could be relevant in the event of a related rule breach.
This article is to remind member firms of their responsibilities under London Stock Exchange Rule 2101 and associated guidance, particularly with respect to the appropriateness of passive limit order prices being placed onto our markets.
The majority of regulatory texts related to pre-trade controls relate to avoiding large order volumes or erroneous order prices which lead to immediate, aggressive execution – informally known as ‘fat finger’ errors. In more recent times, such a scenario tends to be as a result of a misconfigured execution algorithm or technical issue which immediately executes at an inappropriate volume and/or price.
Recently London Stock Exchange (the Exchange) has identified examples of passive orders which had a material impact on respective uncrossing prices of non-continuous trading periods. In various instances the Exchange observed relatively small passive orders being entered into the order book at price levels which were significantly away from the current market valuation, or any reasonable historical trading range. In an ordinary environment the insertion of such an order would simply sit at the boundaries of the order book without any impact, however, in periods of extreme market volatility and reduced liquidity such orders can materially impact execution prices. Not only does the order placement in itself create a potentially illogical uncrossing price, extreme indicative auction prices may also be exacerbated by automated trading or via direct market access whereby a number of unrelated algorithms place further orders at the new high/low set by the original passive order.
In some instances, the Exchange took action to temporarily halt trading in affected instruments, cancel transactions or restate closing prices related to such order flow. Such action causes material disruption to market participants and reference data; two such examples were observed in March 2020 in the case of AB Foods (N02/20) and Ricardo (N04/20). In both cases the Exchange intervened and cancelled automatic trades so that prices, or other users, were not materially impacted. As a result, the Exchange took disciplinary action in the form of private Warning Notices against the member firms involved.
Upon reaching out to market participants to discuss pre-trade controls, some of the following themes were observed:
- upon order entry, few firms utilised controls (hard or soft) or live alerting on passive order prices placed at extreme levels versus the current market price;
- scenarios where live monitoring failed to identify indicative (or realised) auction uncrossing prices far away from theoretical fair value; and
- some views that order prices were valid at any price level as long as they were passive.
The Exchange recommends that all member firms review and regularly reassess their pre-trade passive controls (such as price outside of any reasonable historic distribution/trading range or order prices many multiples away from the current bid offer spread) to ensure that orders are not placed at inappropriate levels resulting in market disruption in periods of increased volatility.
The Rules of the London Stock Exchange (“the Exchange”), including those of the London Stock Exchange Derivatives Market (“LSEDM”), stipulate that member firms must have adequate systems and controls in place to prevent the entry of erroneous orders to the trading system (see Exchange Rule 2101 and LSEDM Rule 4.1.4).
The purpose of this article is to highlight the importance of member firms maintaining appropriate pre-trade controls in order to prevent the submission of erroneous orders into the trading system which have the potential to cause short-term market dislocation, particularly in relation to the Exchange order book. The Exchange would like to stress to all member firms that Exchange circuit breakers or volatility constraint mechanisms, such as the Automatic Execution Suspension Periods (“AESPs”, commonly referred to as circuit breakers), should never be relied upon to deal with erroneous orders, or used as an alternative, to in-house pre-trade controls.
Erroneous orders can have a significant impact on trading across single and multiple instruments and erroneous program trades (also known as basket orders) have a particularly high potential to cause trading disruption, primarily due to the nature of their order entry and execution. These execution factors include multiple instruments selected in a single dealing instruction, large notional basket values at closing/expiry auctions and the general ‘wave’ functionality of program execution, whereby multiple similar waves of orders can be entered into the market.
The wave dynamic can mask potential erroneous order duplication, particularly where the member firm is providing Direct Market Access (“DMA”) to a client and does not therefore have full visibility of the parent order size. Maximum order value limits may also prove ineffective where the overall basket consideration, although potentially large enough to cause a significant market impact, remains below an internally approved limit. This is more likely during derivative expiry periods, when larger basket orders and trading volumes are expected. The Exchange has observed instances where a combination of these factors has caused short-term price disruption across multiple instruments.
Member firms should carefully consider effective technical and manual mechanisms (including pre-trade front office intervention) to potentially identify and prevent erroneous duplicate orders being released to the Exchange.
The importance of using sophisticated pre-trade controls around Direct Electronic Access (“DEA”) orders were highlighted in the FCA’s Market Watch 48. The update also notes that firms with less sophisticated controls may be at risk of not fully complying with the ESMA guidelines on ‘Systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities'. Examples of sophisticated controls as observed by the FCA included:
- Symbol (stock) specific criteria such as percentage of average daily volume (ADV).
- Aggregate/Exposure controls that are symbol (stock) specific.
- Aggregate/Exposure limits broken down into separate time segments (for example 30-60 minute slots).
- Participation (percentage of traded volume) alerts.
- Automated restrictions on non-priced (market) orders.
- Market impact controls.
It should be noted that, whilst the above mentioned controls can be highly effective, they require considered parameters and thresholds to be maintained in order for them to function correctly.
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Early in 2014, the Exchange introduced the Member Controls Oversight Programme (“MCOP”). This was established in response to the publication by the FCA in August 2013 of finalised guidance on ‘Market Operators’ oversight of member firm compliance with rules’. This guidance outlines the approach the FCA expects recognised investment exchanges (“RIEs”) and multilateral trading facilities (“MTFs”) to take to ensure on-going oversight of the systems and controls which their member firms operate to comply with the RIE’s or MTF operator’s rulebook.
All market operators are required to have in place proactive, effective, proportionate and risk-based arrangements in order to be able to determine that their members’ systems and controls can be reasonably expected to ensure compliance with the respective market operator’s rules and trading procedures by both new and existing members.
The Exchange’s MCOP is based around a programme of reviews of an identified population of firms over a six-monthly cycle. Firms which are selected for review are required to complete a systems and controls questionnaire covering matters such as the pre-trade controls they operate during each trading phase for each type of order flow; the monitoring by the firm of its trading activity; automated trading management; and how firms ensure that trading staff are sufficiently aware of the Exchange’s rules. Following receipt and review of each completed questionnaire, the Exchange determines whether clarifications are necessary and/or whether further discussions are required, either in a meeting or conference call.
The aim of the reviews is to identify the risks to the Exchange of firms whose controls are not of a sufficiently high standard to prevent disruption to orderly trading. Where controls are not considered to be sufficient in relation to the nature of a firm’s business, the Exchange will draw this to the attention of the firm and require remedial action.
Accurate and comprehensive completion of systems and controls questionnaires is essential to enable the Exchange to assess the adequacy of a firm’s controls. Failure to do so may constitute a breach of, for example, Exchange Rules 1210 and 1211 and LSEDM Rules 1.1.39 and 1.1.40. Furthermore, in the event of erroneous order entry by a member firm or its DEA client, where one has been completed, the Exchange will consider the firm’s responses in its systems and controls questionnaire and any discrepancies between the responses provided and the actual controls in operation will be taken into consideration by the Exchange in deciding whether to take disciplinary action against the firm. The Exchange recently took disciplinary action against a member firm for providing inaccurate information in a systems and controls questionnaire.
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It is important for the Exchange to ensure that its member firm records remain up-to-date so that it has access to the correct information in the event of queries and problems.
Changes in authorisation
Exchange Rule 1010 and LSEDM Rule 1.1.2 state that “A member firm must at all times be authorised under relevant United Kingdom, or appropriate overseas legislation, or in the view of the Exchange be otherwise sufficiently regulated, in respect of capital adequacy, and fitness and probity”. Therefore, any changes to a member firm’s authorisation, such as a loss of authorisation or related permissions, must be notified to the Exchange. This notification should be immediate in accordance with Exchange Rule 1050 and LSEDM Rule 1.1.20 which state, that “A member firm shall, immediately upon becoming aware of any circumstances which have, will or may lead to a contravention of any of the rules…notify the Exchange of such circumstances in as much detail as is available to it”. Failure of a member firm to notify the Exchange in such circumstances may result in a breach of this rule by the member firm.
Membership profile changes
Member firms wishing to change their membership profile have a notification requirement to the Exchange. Exchange Rule 1051 and LSEDM Rule 1.1.21 state that “A member firm shall notify the Exchange in writing, at least 21 calendar days in advance of the proposed effective date, of any proposed changes to its membership profile”. The Exchange would expect notification of, at a minimum, the following profile changes:
- name and address of the member firm;
- senior executive officer or compliance officer of the member firm;
- scope of trading activity in relation to on Exchange business, including trading codes;
- access to the trading system; and
- scope of settlement and clearing arrangements in relation to on Exchange business, including settlement and clearing codes.
Advance notification enables the Exchange to manage the associated change in conjunction with the member firm, third party suppliers, central counterparties and central securities depositories. The Exchange also has a responsibility to ensure that sufficient notice is given to other member firms, where appropriate, by publishing a Member Firm Information Sheet. A member firm can update its profile by emailing the Membership Team at membership@lseg.com. For queries or matters which require direct assistance, please contact Membership on (020)7 797 1900.
Compliance contacts
The Exchange also wishes to reiterate the importance of member firms informing it of any changes to their compliance staff and contact details. Exchange Rule 1020.4 and LSEDM Rule 1.1.9 (iv) state that “A member firm must, to ensure compliance with these rules, at all times have …. one or more compliance officers who shall be identified to the Exchange and be competent to advise the member firm and its employees on the application of these rules”. Correct information is essential to enable the Exchange to contact firms in relation to trading issues and also in relation to other matters such as the completion of MCOP systems and controls questionnaires. Member firms are therefore requested to ensure that they have provided the Exchange with up-to-date compliance contact details. This can be done by contacting the Exchange’s Market Supervision team at MktSrvsMarketMonitoring@lseg.com or on (020) 7797 3666, option 2.
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