London Exchange Is Back In Business... For Now

LONDON -

Monday was a calamitous day for the London Stock Exchange: a computer glitch meant that it not only missed out on the high volumes of trading on global exchanges following the news that Fannie Mae and Freddie Mac were being taken over, it could now begin to lose even more business to alternative platforms as traders question its reliability.

"It was a massive issue for the LSE," said Mark Priest, senior trader at spread-betting firm TradIndex, who said he turned to Chi-X, a recently set up alternative-trading platform, after the London Stock Exchange went down between 9:15 am. and 4:00 p.m. in London on Monday. "A lot of people didn't have access to those alternative exchanges, and were looking at a dead screen."

"It raises the question of reliability, and if volumes start to go to other platforms, that will be a major competition problem for the LSE," said James Hughes, a market analyst at CMC Markets. The London Stock Exchange (other-otc: LDNXF - news - people ) can at least boast high levels of liquidity--Priest said that the level of liquidity on Chi-X still wasn't "quite all there."

Yet if there are more glitches, or the LSE fails to explain what happened, that could drive more liquidity to its competitors. "If the problem ends up being attributed to the high volumes of trading that they weren't able to cope with, that would be seen as quite a serious issue," said Fox-Pitt Cochran Caronia analyst Andrew Mitchell.

LSE shares have more than halved since the start of the year on fears about the impact of competition, and for now investors seem to be waiting to see whether Monday's outage will have a longer term impact on the activity of traders. Its shares were up 0.2%, or 1.50 pence (3 cents), at 801.50 pence ($14.12) in London on Tuesday morning.

Trading had suspended for almost the entire session on Monday after the LSE experienced "connectivity issues," a spokeswoman for the exchange told Forbes.com. "We will be investigating this and will do everything we can to make sure this doesn't reoccur," she said, declining to give details of the glitch.

Once trading resumed, the FTSE 100 index jumped to end the day up 3.9%, along with much of the rest of the world's stock markets after the U.S. Department of the Treasury took control of Freddie Mac and Fannie Mae and their $5.4 billion in debt and mortgage-backed securities.

The consequences of the glitch go beyond the embarrassing headlines and come at a time that the exchange is facing stiff competition from the likes of Chi-X, the first alternative trading platform up and running, following the introduction of European regulations opening up a market dominated by traditional exchanges. (See "LSE Wont Be Chi-Xed Yet.")

The LSE has been forced to cut prices as alternative trading platforms threaten to take away business, particularly from high-speed program traders. Chi-X has been getting about 14.0% of trading in FTSE 100 shares. On Monday, Chi-X certainly seemed to be benefiting from LSE's woes, accounting for 22.8% of book orders, according to live data on its Web site.

Meanwhile the competition only threatens to get more intense. BATS Trading, which has proved to be a major challenger for the New York Stock Exchange, will shortly be launching a pan-European platform, as will Nasdaq OMX, which begins trading on Sept. 26.

The problem has also come at a time that trading volumes on cash equity exchanges has fallen amid financial-market turmoil; it was down an average of 33.0% in Europe during August. "Everyone would have expected Monday to be a high-volume day given the weekend events," said Mitchell.