LSE’s 86 percent rise in SETS trading raises questions

Further to the mention of Iraq’s electronic trading exchange
going live this week, the LSE has been running electronic trading since
1986, when the Big Bang moved the Exchange from open outcry to
electronic trading.

This led to the introduction of SEAQ,
the Stock Exchange Automated Quotation System, in October 1987.  SEAQ
was supplanted in October 1997 with SETS, Stock Exchange Electronic
Trading, for highly liquid share trading.   

Yesterday, the LSE announced
their latest trading results, which showed an 86% rise in average daily
trading on SETS for the last eleven months.  This is down to a mixture
of market volatility, combined with algo trading and heavy discounting
for volume trading. 

The average number of trades per day is
now 629,000, compared with 338,000 a year ago, with the average daily
value traded up 43% to £9 billion per day.      

Interestingly, with MarkitBOAT, Turquoise and Chi-x
all breathing down their necks, the fact that LSE is still growing the
number of professional terminals receiving LSE real time data (up
15,000 since February 2007 and 4,000 since December 2007 to 111,000
terminals) must be of particular cheer for them.

On the downside
though, is the fact that the amount of money they earn for each trade,
based upon trading fees, is falling fast.  The figures are now 89 pence
earned per trade, compared to £1.34 last year.  This demonstrates how
the LSE are being forced to offer bulk discounts to keep up with these
new execution venues. 

Such discounting will, of
course, increase volumes as it gets cheaper the more you do.  However,
long-term, bulk volume could just as easily shift as it gets into a
rate war and if volume shifts, in light of this charging policy, it
will be high volume movement.

This discount for bulk policy could place LSE's future profitability in
serious jeopardy therefore; or it could actually make them
supercompetitive to beat off these alternative platforms.  It's all
about volume, speed and value in our search for liquidity with best
execution.

Hey ho, the merry-o ... or is that hey-ho the MiFID-oh!

Meanwhile,
securitised derivatives trading reduced slightly to 4 million trades
from 4.3 million ... I wonder why that would be?  Oh yes, a credit
crisis!