Halting LSE trading: The Chancellor or the circuit breakers

You can now add the UK Chancellor pulling rank and ordering a halt to trading on the London Stock Exchange to the list of scare stories surrounding the EU referendum.

Chancellor of the Exchequer George Osborne delivers a speech on the potential economic impact to the UK on leaving the European Union (EU), at a B&Q Store Support Office, on May 23, 2016

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The history books do not readily throw up examples of high-level political interference in UK stock markets

A headline in the Daily Telegraph on June 20 – George Osborne refuses to rule out suspending trading on the London stock market if Britons vote for Brexit – is likely to have raised a few eyebrows on City trading desks, and perhaps some panic too.

His exact words, in response to an LBC radio interviewer asking whether Osborne would consider suspending trading if stocks tanked on Friday, were that he, the Bank of England, its Governor Mark Carney and the Treasury had “of course discussed contingency plans”.

Scaremongering over the impact of a Brexit vote on London’s economy has been ramping up for weeks. But given that exchanges exist to give investors an opportunity to take positions during major market-moving events, such as referenda, this one feels particularly implausible.

Asked whether the Chancellor could make such a request failed to elicit a definitive answer from the LSE. A spokesman for Osborne declined to comment.

And so to the history books, which do not readily throw up precedent for such high-level political interference in the UK’s stock markets in times of immense stress, the obvious exceptions coming during the First and Second World Wars. Its closure during the first of those two great conflicts would appear to be the last time it shut due to government intervention.

The LSE stayed up and running during Black Monday in 1987, and when the UK left the Exchange Rate Mechanism in 1992. It even kept going following the 9/11 US terror attacks in 2001 – an event that sent shockwaves through global markets.

Smaller outages have occurred of course over the years, though these have mainly been the result of technology glitches. The fact that it has taken the world going to war to truly force their closure for sustained periods serves as a reminder of the resilience of UK markets.

It is worth remembering that one of a stock exchange’s fundamental principles is being committed to running fair and orderly markets. In the UK, an exchange itself is the primary adjudicator of this, along with the UK’s Financial Conduct Authority.

While a Chancellor of the Exchequer may make his opinion known indirectly through the Bank of England or FCA, it would take something extraordinary for direct intervention. Exchanges themselves are far more likely to implement their own measures to deal with severe price swings.

Patrick Young, a consultant and former exchange executive, said: “The likelihood of a regulator in the western world deciding that a market should close before the market itself is incredibly low. Usually the traffic is other way round, it is the market that is informing the regulator that it is closing, either due to a technical failure or a massive imbalance of orders.”

The LSE has had circuit breakers in place for many years, designed to temporarily suspend trading in certain stocks if their prices move too wildly. Trading will resume after the affected shares are put into auctions to give brokers time to enter and remove orders without any trades executing.

The circuit breakers can trigger via two systems. The first halts trading in a security if its price moves by a certain percentage from market open. In the case of the largest FTSE 100 stocks, that limit is 10% and is actually triggered relatively frequently. The second is a “dynamic monitoring” system, which kicks in if the price of a potential transaction differs wildly from the stock’s quoted price. In the case of the largest FTSE 100 stocks, that percentage is 5% and it is relatively uncommon for it to be triggered.

But even if – whether by circuit breakers or the hand of Osborne – trading grinds to a halt on the LSE in the event of a Brexit, there would still be other places to buy and sell UK stocks.

Since 2007, changes in regulation have given birth to a range of alternative exchanges, including the region’s largest, Bats Europe, as well as a multitude of broker-owned platforms on which banks can match orders. European trading platforms, unlike those in the US, do not take a common approach to circuit breakers, so it could well be that alternative venues would continue to run even if the LSE didn’t.

And if you can’t trade on exchanges, there are always the over-the-counter markets and the old ways: brokers could return to trading over the phone.

Andrew Formica, the chief executive of Henderson Global Investors, told journalists at a dinner on June 22 that a “lot of the investment banks and brokers we talk to are saying that they will be turning off their algorithms on Friday and making sure that only phone orders are accepted. They don’t want trades that will cause wild swings in thin markets. I think this is quite sensible.”

So even if the UK opts out on Friday, the market will almost certainly find a way to let people make their Brexit trades.

Young said: “The historical badge of honour for London has been that it remains open, come what may. That has always been part of the City’s appeal”.

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