Electronic trading - equity
London Stock Exchange markets
SETS Order Book
- stocks covered are FTSE All Share and FTSE AIM UK50 index and most liquid smaller companies, ETFs and ETCs
- auction starts the day at 8:00
- continuous trading / orders entered 8:00 to 16:30
- auction closes the day at 16:30
- all trades settled via Central Counterparty (CCP)
http://www.londonstockexchange.com/products-and-services/trading-services/sets/sets.htm
SETS QX
- stocks covered are less liquid smaller companies
- auction starts the day at 8:00
- continuous trading via market makers and four intra-day auctions 8:00 to 16:30
- auction closes the day 16:30
- all trades settled via CCP
http://www.londonstockexchange.com/products-and-services/trading-services/setsqx/setsqx.htm
SEAQ
- SEAQ is the London Stock Exchange’s non-electronically executable quotation service that allows market makers to quote prices in AIM securities (not traded on SETS or SETSqx) as well as a number of fixed interest securities.
http://www.londonstockexchange.com/products-and-services/trading-services/seaq/seaq.htm
International Order Book
- stocks are from fast growing economies, for example, in Central and Eastern Europe, Asia and the Middle East via depositary receipts (DRs).
- auction starts the day at 8:00
- continuous trading via market makers and orders entered 8:00 to 16:30
- auction closes the day 16:30
- trades can be settled via CCP for the most liquid securities
Order Book
Above is a screenshot of Vodafone ordinary shares quoted on the London Stock Exchange order book.
In this example traders (passive / liquidity makers) have posted limit orders on the order book. The best prices are displayed on the yellow strip. Priority of orders on the order book is based on price and time.
A trader wishing to trade immediately at the best price would post an order (aggressive / liquidity taker) to either sell up to 71,006 shares at 162.9p (the bid price) or buy up to 79,959 shares at 162.95p (the offer price).
Order types
- Market order – no price limit, takes liquidity
- Limit order – an order with a price limit to buy at a maximum stated price or sell at minimum stated price. This type of order will remain on the order book until executed or cancelled.
- Iceberg – An order for a large size where only a portion of the order is visible on the order book (the tip of the iceberg) and the remaining portion is hidden. Upon execution of the visible part of the order, a portion of the remaining hidden order will become visible. This type of order will remain on the order book until executed or cancelled.
- Hidden – Using the MiFID large in scale criteria, participants are able to directly interact with the order book without providing any pre-trade transparency. The hidden pegged functionality provides a further option to automatically link an order to the mid of bid / offer, offering price improvement against the displayed liquidity. Both order types are protected by the option of setting a minimum execution size. This type of order will remain on the order book until executed or cancelled.
Additional order type functionality:
- Fill or Kill – execution in full or not at all
- Execute and Eliminate – execute fullest possible and eliminate remainder
- Good till cancelled – unexecuted remains on book
- Good till time – unexecuted remains on book until specified time
Trading suspensions
Order books can be subject to rapid price movements. TradElect operates price monitoring functionality that tracks the prices at which automatic executions are occurring and will halt execution if certain price movement tolerances could be breached.
If the price of a potential execution is more than a defined percentage above or below the reference price then no executions at that price will occur, an automatic execution suspension period will be triggered and further automatic execution will be temporarily suspended.
A typical defined percentage movement for a high liquidity stock will be 5% ranging to a 25% movement for a stock with low liquidity (as at Sep10).
Order book securities will resume trading with an auction, once the auction is completed continuous trading recommences.
Price monitoring parameters can be found here:
http://www.londonstockexchange.com/traders-and-brokers/rules-regulations/order-book-trading/order-book-trading.htm
Trade execution – what’s next?
Acknowledgement is sent to the firms involved, confirming that their orders have been executed, this will include size of execution (an order may partially execute), price and time. This information will also be published to the market as a trade report.
Clearing
After a trade has been matched, usually by a trading system, it is cleared. At this stage, a central counterparty (CCP) stands between the buyer and seller. By simultaneously buying from the seller, and selling to the buyer, the CCP reduces the counterparty risk to both parties. This is because if one party defaults, the CCP will manage the loss using margin collected. The CCP for a trade on London Stock Exchange will be either LCH.Clearnet or SIX x-clear.
Settlement
Settlement is the process of delivering title to the financial instrument to the buyer against payment to the seller. For equities, this normally takes place three days after the trade. Netted settlement reduces a large number of positions to a single position/payment.
Custody
A custodian or Central Securities Depositary (CSD) undertakes the safekeeping and administration of securities on behalf of issuers and investors. The CSD for a trade on London Stock Exchange will be Euroclear.