TRADING SERVICES VERSION 1.1 - JULY 2009
Guide to TradElect Version History
Issue Date Description 0.4 October 2007 First MiFID draft 1 February 2008 Finalised MiFID version 1.1 June 2009 Format change and minor updates Use of This Document
This confidential document is the property of The London Stock Exchange plc trading as the London Stock Exchange and neither the document nor its contents may be disclosed to a third party, nor may it be copied, without the London Stock Exchange’s prior written consent.
The Exchange endeavours to ensure that the data and other material in this publication are correct and complete but does not accept liability for any error herein or omissions herefrom.
The development of Exchange products and services is continuous and published information may not be up to date. It is important to check the current position with the Exchange.
The following are trade/service marks of the London Stock Exchange:
• Daily Official List • RNS • EUROSETS • SEAQ • Extranex • SETSqx • FTSE • SEDOL • Infolect • SETS • International Order Book • TradElect • London Stock Exchange Copyright © 2009 London Stock Exchange plc. All rights reserved. No part of the publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photo-copying, recording or otherwise without the prior permission of the copyright owner. Preface
TRADING SERVICES DOCUMENTATION
This document is one of two key documents, supplied as a set, which describe the trading services of the London Stock Exchange and the operation of the London Stock Exchange’s TradElect system. The two documents are:
• Guide to TradElect • TradElect Parameters
Copies of both documents and further information can be obtained from the Trading Services page on the London Stock Exchange web site at: http://www.londonstockexchange.com/tradingservices
GUIDE TO TRADELECT
TradElect is the London Stock Exchange’s trading system. It brings unprecedented levels of performance, enhanced functionality and new services to our markets. It allows our customers to trade on one of the fastest, most reliable and technologically advanced equity markets in the world.
This document provides a detailed overview of TradElect and has been designed for users of TradElect system. The document is divided into the following sections:
• Market structure • Order book services • Quote driven services • Trade reporting • Market situations
This document provides detailed information on the operation of TradElect and describes in generic terms the operation of the trading services, accessible by members of the Exchange, supported by TradElect. The detailed operation of each trading service is governed by the specific configuration of TradElect for that service and the Rules of the London Stock Exchange. The TradElect Parameters document provides details of the TradElect configuration for each trading service.
This guide principally covers non-regulatory information. It does not override or supersede the Rules of the London Stock Exchange (‘The Rules’) and is intended to be read in conjunction with the Rules and the TradElect Parameters document. Whilst this guide describes the operation of TradElect, it is not a technical specification, nor does it form part of the contractual documentation between the Exchange and its customers. The Technical Specification series of documents provide a more detailed technical overview. Copies of these documents and further information can be obtained from the Technical Library on the London Stock Exchange web site at: http://www.londonstockexchange.com/information-providers/technical-library/technical- specifications/technical-specifications.htm Trading services supported by TradElect:
SETS- Stock Exchange Electronic Trading Service SETSqx - Stock Exchange Electronic Trading Service – quotes and crosses SEAQ - Stock Exchange Automated Quotation System EUROSETS European Quoting Service (EQS) European Trade Reporting Service International Order Book (IOB) International Bulletin Board (ITBB)
This guide does not cover services provided off Exchange.
Important note This document describes how TradElect, and the trading services it supports, operates. References to specific data formats, content and validation are to the current versions of all TradElect messages.
In some instances, TradElect also supports legacy message versions which may differ in format, content from current versions and which may therefore not support all current functionality. Where appropriate, this document identifies functionality not supported by legacy message versions and explains how legacy messages are processed.
References to legacy message support are presented in this format. Table of Contents
Table of Contents...... 1 1. Market structure...... 3 OVERVIEW...... 3 TRADABLE INSTRUMENT STRUCTURE...... 4 Markets...... 4 Segments and trading services...... 5 Sectors...... 6 Tradable instruments and securities...... 6 PARTICIPANT STRUCTURE...... 7 Trader groups...... 8 Roles...... 8 PERIODS...... 8 Default period schedule...... 8 Temporary period schedule...... 9 Illustrative periods...... 9 REFERENCE DATA...... 10 Liquidity measures...... 10 Dynamic tick sizes...... 11 Clearing type...... 12 2. Order Books...... 13 OVERVIEW...... 13 Key features...... 13 ORDER BOOK FUNCTIONALITY...... 14 MARKET MECHANISM AND ORDER TYPES...... 14 Limit order...... 14 Market order...... 14 Iceberg order...... 15 Named order...... 15 VALIDITY TYPE...... 15 Execution based validity and non-persistent orders...... 15 Time based validity and persistent orders...... 16 Period based validity and parked orders...... 16 ORDER CODES...... 18 Private order code...... 18 Public order code...... 18 CONTENT OF ORDERS...... 18 Order size and price...... 18 Capacity and settlement account...... 18 MANAGEMENT OF ORDERS...... 19 Order entry...... 19 Order deletion...... 19 Order modification...... 20 Basket messages...... 21 EXECUTION ALGORITHMS...... 21 Continuous execution...... 21 Auction...... 21 TRADE EXECUTION INFORMATION...... 22 Passive/aggressive indicator...... 22 ORDER BOOK PERIODS – ORDER MANAGEMENT PERIODS...... 22 Order management...... 22 Order book closed...... 22 ORDER BOOK PERIODS – CONTINUOUS EXECUTION PERIODS...... 22 ORDER BOOK PERIODS - AUCTIONS...... 23 ORDER BOOK PERIODS – AUCTION CALL PERIODS...... 24 ORDER BOOK PERIODS – AUCTION EXTENSION PERIODS...... 24 Price monitoring extensions...... 24 Market order extension...... 25
London Stock Exchange Page 1 of 36 PRICE MONITORING...... 25 Reference prices...... 25 Exceeding price tolerance levels...... 26 ORDER BOOKS – REFERENCE PRICES...... 27 Opening price...... 27 Best bid, ask and mid price...... 27 TradElect determines the best bid, ask and offer prices from firm orders on the order book...... 27 Closing price...... 28 3. Quotes and market makers...... 29 OVERVIEW...... 29 MECHANISM TYPE AND QUOTE TYPES...... 29 Executable quote and order books...... 29 Firm quote and quote books...... 29 CONTENT OF QUOTES...... 29 Quote size and price...... 29 Maximum spread...... 30 Capacity and settlement account...... 30 MANGEMENT OF QUOTES...... 30 Quote entry...... 30 Quote deletion...... 30 Quote modification...... 30 Basket messages...... 31 QUOTE BOOK PERIODS...... 31 Pre-mandatory quote period...... 31 Mandatory quote period...... 31 Post mandatory quote period...... 31 QUOTE BOOKS – REFERENCE PRICES...... 31 Determination of opening price...... 31 Determination of closing price...... 31 4. Trade reporting...... 32 OVERVIEW...... 32 Capacity...... 32 TRADE REPORT VALIDATION...... 32 Eligible trade types for segment...... 32 Reporting party and counterparty...... 32 Price validation...... 32 AMENDING TRADE REPORTS...... 33 Manual trade reports – corrections and cancellations...... 33 Automatic trade reports –contras...... 33 DUAL-SIDED TRADE REPORTING...... 34 TRADE PUBLICATION...... 34 5. Market situations...... 35 OVERVIEW...... 35 6. Further Information...... 36
London Stock Exchange Page 2 of 36 1 Market structure
OVERVIEW
TradElect is a highly flexible and configurable system that supports a wide range of market models and behaviours. Market structure is controlled through system rules which provide flexibility in the way each trading service can be configured. The ability to enable and disable different areas of functionality, and the available combination of sets of different rules allows the Exchange to divide each market we operate into sub-sections: distinct market segments and sectors can be established and operated according to different conventions, as market and regulatory conditions require.
The range of functions available on TradElect includes (but is not limited to): . entry and management of orders – a range of order types and behaviours are supported . entry and management of quotes . automatic execution of orders against orders – in both continuous trading and auctions . entry of and automatic generation of trade reports . calculation of reference data including, opening and closing prices, and continuous reference prices throughout the day.
The components making up the structure of markets are:
Tradable instrument structure . markets o with associated market-level rules and parameters . segments (within a market) o with associated segment-level rules and parameters o groups of segment with common parameters form the distinct Trading Services . sectors (within a segment) o with associated sector-level rules and parameters . tradable instruments (within a sector)
Participant structure . participants . trader groups (within a participant) o with associated trader group-level rules and parameters . trader ID (within a trader group)
Trading periods . period rules o assigned to sectors
Reference data . tick sizes o assigned to sectors
The remainder of this section describes the components of the market structure and provides an overview of the functional scope of the central system.
London Stock Exchange Page 3 of 36 TRADABLE INSTRUMENT STRUCTURE
TradElect supports a hierarchical structure of markets, market segments, market sectors and instruments. This structure allows segregation of the different rules governing the operation of trading services on TradElect and activities of users of TradElect. Table 1 illustrates how this structure is used. Table 1: market structure Division Description Example Defines the geographical elements of a trading environment, including: Market LSE - business calendar - time zone (offset) A trading model common to a number of segments. Trading SETS Service Trading service is not explicitly specified in TradElect but is stated in the description of each segment. Defines a set of securities with common features which may include, for example: - security type (e.g. equity, depositary receipt, debt) Segment - nature of admission (e.g. UKLA listed, EU listed, AIM admitted) SET1 - membership of an index And defines the high level specifications of a trading model which identify the trading service Defines a set of securities with a common behaviour which may include: - Regulated Market or MTF status Sector FT10 - same price monitoring thresholds - same maximum spread And defines the detailed specifications of a trading model The combination of a tradable instrument, country of register, Security segment and trading currency that uniquely identifies a security VOD on TradElect. An individual tradable instrument. Tradable instruments may be Tradable VOD traded on more than one trading service (and therefore in more ords Instrument than one segment) on TradElect.
Markets This document concerns the London market (LSE) and European market (DTS) operated by the London Stock Exchange.
TradElect supports several other markets internationally, including Borsa Italiana (BIT) and the Johannesburg Securities Exchange (JSE).
Aspects of system behaviour governed at market level include: . the timezone offset from UTC, and whether daylight savings time is required . the operational hours for trade reporting
London Stock Exchange Page 4 of 36 Segments and trading services A market segment is a division of a particular market, characterised by a number of specific rules, which govern the trading activities that may take place within that segment. Similar tradable instruments by size, listing or admission and type of security are assigned to a particular segment.
The specifications of each segment define, at a high level, the trading model. The Exchange operates a number of common trading models called trading services.
The Exchange’s trading services have been designed to support a range of security types, size and liquidities. Securities are allocated to a segment, and hence a particular trading service, on consideration of these criteria. If the circumstances of a particularly security change significantly, then the security may be moved to a new segment and/or trading service. Such a move would normally occur on one of the Exchange’s periodic reviews or at an earlier time where appropriate.
Most trading services support execution of trades in TradElect and all trading services support the reporting of trades executed outside of TradElect.
Table 2 sets out the trading services on the Exchange’s London market and identifies some of the key characteristics of each service. A full list of the segments and sectors currently within each trading service are set out in the TradElect Parameters document. Table 2: TradElect trading services Non Continuous Electronic Electronic electronic Trade Name electronic Market CCP auctions market reporting trading Making making SETS Yes Yes Yes No Yes Yes Modified Yes Yes Yes No Yes No SETS SETSqx No Yes No Yes Yes Yes SEAQ No No No Yes Yes No EUROSETS Yes Yes Yes No Yes Yes European Quoting No No No Yes Yes No Service European Trade No No No No Yes No Reporting International Yes Yes No No Yes Yes Order Book International Bulletin No No No No Yes No Board Gilt-edged No No No No Yes No market Fixed interest No No No Yes Yes No market
London Stock Exchange Page 5 of 36 Certain system rules are defined at segment level and these rules are always static (not time dependent). Segment level rules therefore apply constantly to all market sectors, tradable instruments and participants acting within a market segment.
Aspects of system behaviour governed at segment level include: . the maximum acceptable order size (a multiple of EMS) . the maximum acceptable quote size (a multiple of EMS) . the maximum acceptable life of an order (and whether the lifetime of an order is validated) . the times at which trade reports for business executed outside TradElect can be submitted (defined by the start of the trade reporting period and the end of the trade reporting period) . whether trade reports are single-sided or dual-sided and where dual-sided, which dual sided model and the basis for publication . the last time at which trade reports for business executed outside TradElect and outside of market hours can be submitted . whether TraderID is mandatory or optional . whether reference sizes are based on trade size or consideration . whether the closing price may be determined from the closing auction, VWAP, the last automatic trade, the mid-price and the sequence in which the closing price is assessed and determined . the tick size matrix for dynamic tick sizes, where applicable . which trade types are permitted, and whether any associated delay is determined by the size or value of the trade . whether the best price is determined from orders, quotes or both
Sectors A market segment is divided into one or more market sectors. Market sectors are used to group securities within a segment to reflect common characteristics and provide finer control over detailed market configuration.
Each market sector has a schedule of periods – the default period schedule – which govern the usual progression of the trading day.
Aspects of system behaviour governed at sector level include: . the period schedule (the progression through the trading day) . price monitoring thresholds . maximum spreads for quotes
Tradable instruments and securities In order to be used for trading on or reporting to TradElect, a tradable instrument must be assigned to (and enabled in) a specific market segment, sector and currency. A tradable instrument may exist in more than one segment or even within the same segment, provided it has a different country of register.
As a tradable instrument may be traded on a number of trading services in one or more segments, a security on TradElect is uniquely specified by the combination of Tradable Instrument Code, Country of Register, Market Segment Code and Currency Code.
Events can occur in individual securities throughout the trading day that my cause the security to move away from its default period schedule (set at sector level) into a temporary period schedule specific to that security. For example, a large price move in a security can trigger an automatic execution suspension period (AESP) – from this point onwards the security will have its own temporary period schedule for the remainder of the current trading day.
London Stock Exchange Page 6 of 36 Aspects of system behaviour governed at tradable instrument level include: . temporary period schedules, when triggered . temporary price monitoring and maximum spread overrides
PARTICIPANT STRUCTURE
To access TradElect to undertake on Exchange business a firm must be a member of the Exchange and enabled as a participant on TradElect, or must be accessing TradElect via a member authorised connection.
TradElect provides an optional hierarchical structure for participants consisting of member ID, trader group and trader ID as set out in table 3 below. Table 3: participant structure The level at which a firm is a member of the Exchange. This is typically at Member legal entity level. Member is not used within TradElect. The highest level for defining a participant within TradElect. This is intended to correspond to the firm’s highest entity. Member ID is used, where appropriate, to identify a participant in broadcast messages. Member ID Member ID is used by a participant to identify its counterparty in TradElect. Member ID codes must be unique and are assigned by the Exchange. Each member ID is associated with a unique trading mnemonic. One member ID may be subdivided into many Trader Groups. A subdivision of member ID. All authorisations and enablements to undertake activity on TradElect are set at this level. Every member ID must have at least one trader group. Additional trader Trader groups are optional. Trader Group must not be left blank. group Trader group is private and is only used on messages between the Exchange and the relevant member ID. Trader Group is never broadcast. Trader Group codes must be unique (across all Member IDs). One trader group may be subdivided into many Trader IDs. A subdivision a Trader Group. All Trader IDs within the same Trader Group share the same authority. The use of trader ID is not mandated by the Exchange and is entirely optional. Trader ID may be left blank. Trader ID Trader ID is private and is only used on messages between the Exchange and the relevant member ID and trader group. Trader ID is never broadcast. Trader ID codes must be unique within a Trader Group.
This participant structure can be used to support the identification of desks and/or individuals within a trading entity, such as cash desk, arbitrage, international brokerage, direct market access and automated trading systems.
London Stock Exchange Page 7 of 36 Trader groups As all access and control within TradElect operates at trader group level, the Exchange recommends that all participants consider their participant structure carefully. In particular, participants should consider whether it is appropriate to segregate systems, trading desks or clients using trader groups thus allowing finer control by the Exchange in event of system issues.
The introduction of Trader Groups improves the ability to direct responses back to the originator of the message. There is a many-to-many relationship between Trader Group and User Service Access Point (USAP). A default USAP will be set up for each Trader Group for the purpose of routing any unsolicited messages that cannot be attributed to a specific Trader Group and/or USAP.
Customers wishing to take advantage of the Participant structure will need to supply details of the trader group(s) for the Member ID that they would like to have enabled on the Multiple trader group form which can be found at: http://www.londonstockexchange.com/traders-and-brokers/rules- regulations/formsagreements/formsagreements.htm
Roles The use of TradElect by participants is controlled at a detailed level through a system of roles. A role is a defined set of activities that any Trader Group assigned to that role is able to undertake. Activities controlled by role include:
. the ability to enter orders and the use of specific order types . the ability to enter trade reports and the use of specific trade types . the ability to enter quotes and the use of specific quote types
In addition, the validation applied to certain activities (for example, minimum order size or maximum spreads) is also defined by the role in which the trader group is operating.
A Trader Group must be assigned an appropriate role before being authorised to enter orders or quotes or trades (as appropriate) for a particular Instrument. Roles can be assigned at a segment level (e.g. the ability to submit trade reports) or at tradable instrument level (e.g. the ability to enter quotes as a market maker). All roles that are registered at tradable instrument level are disseminated to the market in reference data provided by the Exchange. Although all roles are authorised at the Trader Group level, the information disseminated to the market show a consolidated view within a Member ID.
PERIODS The structure of the trading day is defined by a progression through a number of trading periods. A period is a defined time range during which certain functionality is enabled and certain activities may be permitted and other activities may be prohibited.
Default period schedule All securities have a defined default period schedule which sets out the progression of the security through the trading day. The default period schedule is governed by the sector in which the security resides. On a normal day, the security will progress through its default period schedule from opening to close.
At certain points in the trading day periods in the default period schedule may or may not occur in accordance with market circumstances. In particular, at the end of an auction call period certain extension periods may be triggered depending on the state of the order book –these additional extension periods are part of the default period schedule (and do not transition the security into a temporary period schedule).
London Stock Exchange Page 8 of 36 Temporary period schedule Certain events – for example, the suspension of a security – may trigger an interruption to the default period schedule. When such an event occurs, a new period will be introduced (in this example, a suspension period) and the security will move away from its default period schedule. Once a security has moved off its default period schedule, all periods for the remainder of the day are re-disseminated (with new timings where appropriate) as a new temporary period schedule for that instrument.
Illustrative periods Period behaviour is highly configurable but can be generically grouped in the categories set out below in table 4. Table 4: TradElect periods e l y r b g t a n l e n i i t s r e a o n u o v n o e u t o i a i o t q
i t u
n o s t / u n o u
e e i
Period Name c
l t t q r e m
e o n
/ e x d
u o e d e r c q c r
i e o r d m p r r i o F Administrative periods OPEN No No No No No CLOSE No No No No No Order book periods – order management periods Order management n/a No Yes No No Order book closed n/a No No No No Pre- mandatory committed principal n/a Yes Yes No Yes Post- mandatory committed principal n/a No Yes No n/a Order book periods – continuous trading periods Continuous execution n/a Yes Yes Yes Yes Continuous execution – VWAP period n/a Yes Yes Yes Yes Mandatory committed principal period n/a Yes Yes Yes Yes Order book periods – auction call/match periods Opening auction call n/a Yes Yes No No Closing auction call n/a Yes Yes No No Imported price call n/a Yes Yes No No Automatic execution suspension period n/a Yes Yes No No Order book periods – auction extension periods Price monitoring extension 1 n/a Yes Yes No Yes Price monitoring extension 2 n/a Yes Yes No Yes Market order extension n/a Yes Yes No Yes Quote book periods Pre-mandatory quote period Yes n/a n/a n/a n/a Mandatory quote period Yes n/a n/a n/a n/a
London Stock Exchange Page 9 of 36 Post mandatory quote period Yes n/a n/a n/a n/a
Aspects of system behaviour governed by the prevailing period include: . which types of order are permitted, and whether such orders can be entered and/or deleted and/or modified . which types of order are sent to the order book immediately and which types are parked . which types of order are automatically expired at the start of the period . which types of parked order are automatically injected at the start of the period . which types of order are automatically expired at the end of the period . whether continuous execution is enabled for auction periods: . whether the period is followed by an extension (or extensions) . the sequence in which the uncrossing price is determined for extension periods: . how long the extension period is, and how many times it should occur
REFERENCE DATA A number of aspects of TradElect functionality are controlled by parameters that are assessed against reference data. This reference data is normally determined by the Exchange although for securities within the scope of the Markets in Financial Instruments directive (MiFID securities) certain elements are common across all venues and are set by various European regulators at EU level.
Liquidity measures Certain measures relating to the liquidity of securities are used to validate and control: . maximum and minimum order sizes . maximum and minimum quote sizes . minimum iceberg peak size . minimum auction volumes permitted in uncrossings . publication delays for manual trade reports
TradElect supports four measures of liquidity: two are reference data set at EU level by various European regulators and two are set by the Exchange. The four measures are: . Exchange Market Size – EMS . Normal market size – NMS . Publication Threshold Size - PTS . Standard Market Size – SMS
These liquidity measures may be assessed against either the size of a trade or its consideration (determined as the trade price multiplied by the trade size). This configuration is set at segment level.
Table 5 below sets out further detail on the four measures of liquidity that can be held within TradElect.
London Stock Exchange Page 10 of 36 Table 5: reference sizes Name Set by Exchange usage Other usage Minimum and maximum order and quote sizes Exchange market size Minimum iceberg peak Exchange n/a (EMS) sizes Minimum auction uncrossing volume Normal market size EU EU publication regime Not currently populated (NMS) regulators for OTC trade reports Publication threshold Delayed publication size (PTS) / Average Exchange regime for most Equity on n/a Daily Turnover (ADT) Exchange trade reports EU obligations for Standard market size EU Populated for Liquid Systematic (SMS) regulators* EURM securities Internalisers
EMS and PTS / ADT (set by the Exchange) may reference NMS and SMS (set by EU regulators) but do not have to be set to the same levels. Similarly, PTS / ADT and EMS may be set with reference to each other but can be assigned values calculated on separate basis where appropriate.
TICK SIZES AND PRICE FORMAT CODES The tick size is the minimum valid increment in which prices can be entered and displayed. Each tick size is a numeric amount, representing a multiple of the unit of currency in which the instrument is quoted, and is identified by a single letter price format code.
When submitting an order or quote, the price must be a multiple of the tick size. If the price of an order/quote is not a multiple of the tick size it will be rejected.
Tick sizes may either be ‘static’ or ‘dynamic’: . static tick sizes remain fixed until subject to periodic review by the Exchange; . dynamic tick sizes reflect prevalent market conditions and are explained in more detail below.
Where the tick size is static, a price format code will be assigned to the security; where the tick size is dynamic, the price format code associated with the security will be blank.
The tick sizes and the associated price format codes used in TradElect are set out in the TradElect Parameters document.
Dynamic tick sizes Dynamic tick sizes are defined by a matrix of reference price ranges and tick size values. As an order or quote is entered, each price is assessed against the dynamic tick size matrix to determine the appropriate tick value and hence price validation. Dynamic tick size is enabled at segment level.
Multiple tick sizes will typically be applicable for each segment where dynamic tick sizes are enabled. In order to ensure that all prices are covered, the upper price band for one range will always equal the minimum price band for the next range. Where a price appears in two ranges, the higher tick size must always be used.
London Stock Exchange Page 11 of 36 Every price on the order or quote is validated against the relevant tick size matrix. It is possible for a quote, which has two prices, to straddle the boundary between the bands in the applicable dynamic tick size matrix – in this instance the two ‘halves’ of the quote will be validated against (and must comply with) distinct tick sizes for each price. and is based on the price being entered in the message. Orders and quotes failing tick size validation will be rejected.
A different tick size regime may be defined for each currency within the segment. The TradElect Parameters document sets out the full dynamic tick regime. An illustrative example showing securities traded in GBX and EUR in segment TEST is shown below in Table 6 below.
Table 6: Illustrative dynamic tick size matrix Price Range Segment Currency Lower band Upper band Tick size Format # 1 TEST GBX 0 10 0.01 J # 2 TEST GBX 10 500 0.25 Q # 3 TEST GBX 500 1000 0.5 H # 4 TEST GBX 1000 maximum 1 W # 1 TEST EUR 0 5 0.0025 L # 2 TEST EUR 5 10 0.005 K # 3 TEST EUR 10 maximum 0.01 J Note: Maximum for the price field = 9999999999.99999999 Price Format Code is shown for comparison only – this will not be populated in the message.
Clearing type Clearing type is used on orders, quote and trade reports to represent the intended onward routing of trades. There are currently four clearing types recognised by TradElect and these are set out in the table 7 below. A subset of these four values will be configured for each segment. Table 7: Clearing Type Market Description CLH Clearnet.LCH SA CSH Cash Clearing Type NSV No settlement venue ^^^ Default settlement venue
TradElect supports legacy order, quote and trade messages by defaulting the Clearing type for all legacy message versions to ‘default settlement venue’.
Users of legacy message version will not be able to use any future functionality based on non-default values for clearing type.
London Stock Exchange Page 12 of 36 2 Order Books
OVERVIEW TradElect supports a range of trading services based on the underlying model of an order book. An order book brings together trading interest in a security and provides for automatic execution of trades where trading interests meet.
The following section describes in generic terms the operation of order books on TradElect. The specific configuration of order books used by the trading services on TradElect are set out in the TradElect Parameters document.
Key features All the order books supported by TradElect have a number of common features:
. All orders are firm
. The best price for an order book security is: o the highest bid price on the order book for that security and o the lowest offer price on the order book for that security; or o the last order executed price, where only market orders exist on both sides of the order book.
. Where only market orders exist on the book automatic execution would use the value of the most recent of either: o the last execution price; o the last closing price.
. Orders are executed according to price then time priority o our price display guidelines require information vendors to display orders in this sequence
. When a order sitting on the order book is partially executed, the remaining part of the order retains time priority
. Iceberg orders can be used to display only a portion of an order (the peak) to the market and to automatically refresh as executions occur.
. Orders can be updated by o modification; or . certain modifications allow the modified order to retain time priority o deletion and replacement . the replacement order always moves to the back of the time priority queue
. All trades that result from orders executed on the order book generate automatic trade reports which are published immediately
. Full market depth is published and available to all information subscribers. There are no privileged information flows.
London Stock Exchange Page 13 of 36 ORDER BOOK FUNCTIONALITY
Orders An order represents a firm commitment to trade in a security under specified conditions (which may include price, size, clearing arrangements and settlement arrangements). Participants will only be able to submit orders in specified securities and of specified order types for which they have been enabled.
Orders may be submitted to TradElect for immediate entry into an order book or for entry to an order book on a specific period based condition being met. Orders that are held in such a way are termed ‘parked orders’. The behaviour of an order and its mandatory content is defined by its Market Mechanism Type and Validity Type which are described in more detail below.
The flexibility offered by the combination of Market Mechanism Type and Validity Type allows customers to define orders that are: . priced or unpriced . anonymous or named . fully visible or partially visible (with hidden volume) . persistent or non-persistent . immediately entered into the order book, or triggered by a period change . good for a defined time or good for a defined market period
MARKET MECHANISM AND ORDER TYPES
The Market Mechanism of an order determines what order type it is and whether the order is: . priced or unpriced . anonymous or named . fully visible or partially visible with hidden volume
TradElect supports four different order types identified by their associated market mechanism type. These are set out in Table 8 and described in further detail below. Table 8: market mechanism and order types Market Hidden Order type Priced Anonymous Mechanism Volume LO Limit Order Y Y N MO Market Order N Y N IB Iceberg Order Y Y Y CP Named Order Y N N
Limit order A limit order is an anonymous priced order that is fully displayed when persistent in an order book. Limit orders never have price priority over market orders.
Market order A market order is unpriced, and therefore not price forming, but has price priority over all priced orders. Market orders cannot persist on the order book during continuous trading, therefore only market orders with non-persistant order types can be entered during this period. Persistent market orders can be entered during auctions and will display on the order book during an auction. Any that remain unexecuted following the completion of the auction will be automatically deleted.
London Stock Exchange Page 14 of 36 Because of their optimal price priority, use of a market order maximises the possibility of (but does not guarantee) execution in an auction. However, market orders cannot contribute to the price formation process during the auction.
Iceberg order An iceberg order publicly displays only a portion of its total volume though the total volume is available for execution. The maximum displayed amount, known as the peak size, and the total size of the order can be specified by the participant and must be above specified minimums. TradElect manages the iceberg order by automatically introducing new full peaks into the matching algorithm during execution and the order book following complete execution of a visible peak. Each time a new peak is revealed, it is assigned a new timestamp and loses time priority to other (visible) limit orders at the same price. However, the total volume (visible and hidden) of an iceberg order retains price priority.
Iceberg orders are a very efficient way of undertaking larger than usual volumes of activity on a fully automated basis.
Named order A named order is a non-anonymous limit order.
VALIDITY TYPE
The concept of validity defines the conditions under which an order is entered onto the order book and subsequently removed. Validity can be categorised into three different types; . execution based validity – which defines orders that are non-persistent . time based validity – which defines the expiry of persistent orders that are entered immediately into the order book . period based validity – which defines when an order is entered into and removed from an order book, based on transitions between market trading periods, and allows orders to be ‘parked’ ahead of entry in the order book
Execution based validity and non-persistent orders The execution based validity types define behaviours for orders that do not persist in the order book. On submission, an order with an execution based validity type is assessed for execution, executed where appropriate and immediately removed from the order book. Orders with execution based validity are only visible when they result in immediate executions.
There are two execution based validity types: Fill or Kill (FOK) and Execute and Eliminate (ENE), for full or partial execution respectively. These are described in table 9 below. Table 9: execution based validity types Validity Description Behaviour (Add) Behaviour (Remove) Type Immediately posted to Execute and Unexecuted volume ENE book for execution to the eliminate immediately removed. fullest extent possible. Immediately posted to Unexecuted volume FOK Fill or kill book for execution in full immediately removed. or not at all.
London Stock Exchange Page 15 of 36 Time based validity and persistent orders The time based validity types define orders that persist in the order book until a specified time. On submission, an order with a time based validity type is immediately injected into the order book and assessed for execution, executed where appropriate and any remaining volume persists in the order book.
There are two time based validity types: Good till cancelled (GTC) and Good till time (GTT), which persist for the maximum permitted period or for a configured period respectively. These are described further in table 10 below. Persistent orders may be modified or deleted at any time before they expire though this may result in loss of time and/or price priority.
Table 10: time based validity types Validity Description Behaviour (Add) Behaviour (Remove) Type Unexecuted volume persists Good till Immediately posted to GTC for the maximum permitted cancelled book in this instrument. Good till Immediately posted to Unexecuted volume persists GTT time book until the specified time.
Period based validity and parked orders The period based validity types allow both the entry and removal of the order to be based upon a specific period based transition. Using period based validity types, orders may be ‘parked’ outside the order book until a specified period transition occurs.
An order submitted with a period based validity type will be held in TradElect until the applicable period is reached, at which point it is injected onto the order book. Whilst the order is held by TradElect it is not publicly visible and does not participate in continuous trading or auctions. However, it may still be modified or deleted. Whilst parked, the order will maintain time priority in line with all other orders that have been parked for that particular instrument. If modified whilst parked, the order follows the same rules as it would on the order book to determine whether price and/or time priority is maintained or lost.
As the relevant period becomes effective the order will be ‘injected’ into the order book as if the participant had at that point submitted the order themselves. In continuous trading, the order will then execute to the greatest extent possible with any remaining volume persisting on the order book. The transitioning of a period also controls the subsequent removal of the order. Orders may be deleted or modified at any time before they are removed though this may result in loss of time and/or price priority.
The ability to park orders prior to the period they are intended for ensures that they have a higher priority when going into the period. This is because they are entered prior to any new orders being able to be submitted for that period, however, as illustrated in Figure 1 below, any ‘live’ orders already active on the order book will always have higher priority than the parked orders being injected:
London Stock Exchange Page 16 of 36 Figure 1: parked order priority
Live orders entered at point A have highest time priority Parked orders entered at point B have lower time priority than ‘A’, but higher than ‘C’ Live orders entered at point C have lower time priority than ‘A’ or ‘B’
There are five period based validity types: At the open (ATO), At the close (ATC), Good for auction (GFA), Good for day (GFD) and Good for intra-day auction (GFX) which are described in table 11 below. Table 11: period based validity types Validity Behaviour Description Behaviour (Add) Type (Remove) Parked for injection at the start of Deleted at end of ATC At the Close the next closing auction closing auction Parked for injection at the start of Deleted at end of ATO At the Open the next opening auction opening auction Parked for injection for the next Good for Deleted at end of GFA available auction (Open, Close, Auction auction Intra-Day or AESP) Deleted at closing GFD Good for Day Immediately posted to book period Good for Intra- Parked for injection at the next Deleted at end of GFX Day Auction scheduled intra-day auction auction
TradElect supports legacy order messages by translating these messages to determine corresponding values for Marker Mechanism Type and Validity Type.
Execution based validity (types ENE and FOK) and time based validity (types GTC and GTT) are fully support on legacy message versions through this translation process.
Period based validity (types ATC, ATO, GFA, GFD and GFX) and therefore parked order functionality are not available with legacy message versions.
The translations undertaken by TradElect are set out in table 11A below.
London Stock Exchange Page 17 of 36 Table 11A: market mechanism and validity type: legacy message translation Legacy message Translation Market Is the order Mechanism Validity Mechanism priced? Type Type AA Y LO ENE AB Y LO FOK AA N MO ENE AB N MO FOK CP Y EQ GTT IB Y IB GTT LO Y LO GTT MO N MO GTC
ORDER CODES
In TradElect, each order has, at any time, two identifying codes: a private order code and a public order code.
Private order code The private order code remains constant throughout the lifetime of an order and is unaffected by modifications to the order or, in the case of an iceberg order, any automatic peak refreshes generated by TradElect. The private order code is known only to the Exchange and the participant that submitted the order.
Public order code The public order code of an order changes when the certain modifications are made to an order and, in the case of an iceberg order, any automatic peak refreshes generated by TradElect.
CONTENT OF ORDERS
Order size and price The size of an order on entry must be between the specified minimum and maximum order size for that security. The size of an iceberg order must in addition be equal to or greater than its peak size.
The price of an order on entry must be between the specified minimum and maximum variation for that security from the reference price for that security. The price must be in a multiple of the applicable tick size.
Market orders are the only order type that can be entered with a price of zero. For all priced orders the minimum price will correspond with the tick size or the lowest dynamic tick size where dynamic tick size is enabled.
Capacity and settlement account Every order submitted to TradElect must identify the dealing capacity of the submitting participant and the settlement account for the order. Permitted values are shown in table 12 below. Table 12: capacity and settlement account Capacity (A)gency (P)rincipal Riskless(S) principal Settlement Account (C)lient (H)ouse (S)tanding
London Stock Exchange Page 18 of 36 TradElect supports legacy order messages by translating these messages to determine corresponding values for Capacity and Settlement account.
All current values for Dealing Capacity available on legacy message versions are supported through this translation process.
The translations undertaken by TradElect are set out in table 12A below.
Table 12A: dealing capacity: legacy message translation Legacy message Translation Dealing capacity Capacity Settlement account A (A)gency (S)tanding B (A)gency (H)ouse C (A)gency (C)lient P (P)rincipal (S)tanding Q (P)rincipal (H)ouse R (P)rincipal (C)lient S Riskless(S) principal (S)tanding T Riskless(S) principal (H)ouse U Riskless(S) principal (C)lient
MANAGEMENT OF ORDERS The entry, deletion and modification of orders is allowed during specified periods for each sector. Orders may be modified or deleted both when parked (and not visible) and when visible in an order book.
There may be short periods where TradElect requires exclusive use of orders in a security and existing orders cannot therefore be deleted or modified, for example when the auction uncrossing algorithm is running the order book is briefly ‘locked’ and no order management activities can occur (messages are queued until the order book is ‘unlocked’).
Order entry Orders may be entered provided the security is not suspended and is in a trading period with order entry enabled.
Order deletion When permitted by the relevant period rule in operation, participants may delete individual orders by specifying the order for deletion.
TradElect also supports the deletion of all orders belonging to a specified trader group in a particular segment. This mass order delete functionality is designed for use in the event of system failure. The Exchange recommends that it is NOT used under normal circumstances.
Order modification Orders present in TradElect, whether parked or in the order book, may be updated by participants by specifying the order (by its private order code) and the desired change. The following aspects of an existing order may be modified:
London Stock Exchange Page 19 of 36 . order size . order price (where applicable) . date and time validity (where applicable) . participant reference . client reference
The size of an order is amended by entering the desired relative size change (not, as is the case with quotes, the new absolute size). If the desired amendment reduces the order size to zero the order will be deleted.
Modifications of an order may result in a change in its price and/or time priority and public order code as set out in table 13 below. Table 13: impact of order modification on order priority Impact on Impact on public Modified field Modification priority order code Order size Increase: No impact No impact Iceberg orders Increase: Loses time priority New public order code other orders Decrease No impact No impact Order price Improve Gains price priority New public order code Loses time priority Worsen Loses price priority New public order code Loses time priority Date and time No impact Any change No impact validity Participant Any change No impact No impact reference Client reference Any change No impact No impact Modifications to the size of an Iceberg order are in the first instance applied to the hidden volume and therefore often result in no change to the displayed order. In the case of reductions in size where there is insufficient hidden size to accommodate the full reduction, the displayed size will also be accordingly reduced. These impacts are summarised in table 13A below.
Table 13A: impact of order size modification on Iceberg orders
Modification to Iceberg order size Hidden size Peak size Increase Increase No impact Decrease to greater than current remaining peak size Decrease No impact Decrease to less than current remaining peak size Fully removed Reduced
London Stock Exchange Page 20 of 36 Amending the price of an order by entering a new price will result in the order being resubmitted to the order book at its new price. Where the order is able to immediately execute, the resultant executions are considered aggressive executions by the modified order.
Basket messages TradElect supports the entry or deletion or modification of multiple orders in the same segment using a single ‘basket’ message. The basket provides a wrapper which can contain messages of the same nature (entry or deletion or modification) in the same segment and of any order type. On receipt, the constituent messages of the basket are processed and acknowledged individually. Due to the parallel nature of processing with TradElect it is not possible to guarantee the sequence that messages in different securities will be processed within each basket.
Basket messages are used only in private communication between a participant and the Exchange. The use of a basket message is not publicly disseminated and each constituent message will be broadcast individually.
The basket modification will be treated as individual modifications to the orders specified in the message. It is not possible to perform wholesale changes to a previously submitted basket of entered orders. Basket message functionality is not available with legacy message versions
EXECUTION ALGORITHMS All orders present in the order book are firm and are available for execution when execution assessments are made either during continuous trading or auctions.
When the criteria for execution set out below are met, trades occur on an order-against- order basis. In the case of an execution against an iceberg order, where an incoming order may execute against the peak of an iceberg and one or more subsequent refresh(es), a single amalgamated trade will result irrespective of how many peak refreshes occur.
Continuous execution During continuous execution, each incoming order is assessed against existing orders to identify whether execution can occur. Execution will take place where: . the price of an incoming sell order is lower than or equal to the price of an existing buy order; or . the price of an incoming buy order is higher than or equal to the price of an existing sell order.
The price at which execution(s) occur(s) is determined by the price of the existing orders and is limited by the price of the incoming order.
Existing orders which are modified to have improved price priority are also assessed as incoming orders and may therefore result in execution(s).
The order in which existing orders are executed is determined by price then time priority.
Auction At the end of an auction call period, all existing orders are assessed to see if an execution can occur. Execution will take place where there are: . buy market order(s) and sell order(s) of any type; or . buy order(s) of any type and sell market order(s); or . where there are no market orders, buy order(s) at a price higher than or equal to sell order(s); and
London Stock Exchange Page 21 of 36 . the executable volume is greater than or equal to any defined minimum executable volume
The algorithm which assesses the price at which uncrossing execution will occur determines the execution price to be the price that: . maximises the executable volume; and . if more than one execution price would result in the same executable volume, minimises the surplus volume at the execution price; and . if more than one execution price would result in the same surplus volume at the execution price, reflects the balance of pressure on the order book; and . if the balance of pressure on the order book is even, reflects the reference price in the security; and . if there is no reference price, is the lowest price.
The order in which orders are then executed is determined by price then time priority.
A modified intra-day auction is used to determine the Exchange Delivery Settlement Price (“EDSP”) for valuing expiring Futures and Options products. It commences at 10:10am on the third Friday of the month for FTSE 100 index constituents and the third Friday of every quarter (March, June, September and December) for FTSE 250 constituents.
Imported price auction At the end of an imported price auction call period, all existing orders are assessed to see how much business can occur at the imported price. Execution will take place where there are: . buy market order(s) and sell order(s) of any type at the imported price or lower; or . buy order(s) of any type at the imported price or higher and sell market order(s); or . where there are no market orders, buy order(s) at the imported price or higher and sell order(s) at the imported price or lower
The order in which orders are then executed is determined by price then time priority.
TRADE EXECUTION INFORMATION At the point of execution, either due to automatic matching or uncrossing, the owner of the order receives a confirmation of each trade that has occurred.
Passive/aggressive indicator The trade confirmation explicitly identifies whether the execution took place in a passive or aggressive manner (‘P’ or ‘A’), or whether the trade took place in an auction (U).
ORDER BOOK PERIODS – ORDER MANAGEMENT PERIODS Order management Orders may be deleted following a closing auction but no addition or modification of orders is possible.
Order book closed Orders may not be entered, modified or deleted.
ORDER BOOK PERIODS – CONTINUOUS EXECUTION PERIODS Continuous execution periods represent the bulk of the trading day on many order books. Continuous execution periods provide continuous two-way price formation along with immediacy of execution.
London Stock Exchange Page 22 of 36 Orders may be entered, deleted or modified during continuous execution. On entry or amendment of an order, the order book is assessed by the continuous execution algorithm to determine whether an execution can occur.
Price monitoring is enabled during all continuous execution periods.
Continuous execution normally commences immediately after the completion of the opening auction and continues until the start of the closing auction call period. Continuous execution may be interrupted by scheduled intraday auctions and by any automatic execution suspension periods that may be triggered by price movements in the affected security. Where such an interruption occurs, continuous execution resumes on completion of the auction. There is normally no continuous execution after the closing auction.
In the event that price monitoring functionality is triggered immediately before the scheduled closing auction call, trading may move immediately into an extended closing auction call period. Details of specific parameters for each trading service are detailed in the TradElect Parameters document.
ORDER BOOK PERIODS - AUCTIONS Auctions are intended to concentrate liquidity at specific key times and are used to set the official opening and closing prices in many securities as well as the EDSP price used for settlement of futures and options contracts. Auctions are also used to allow the market to adjust to changes in market conditions e.g. at the start of a new day or following a price movement.
Generically, auctions consist of: . an auction call period of configurable length and with a configurable random end length, followed by . auction extension periods (where necessary) – one or more price monitoring extensions and/or one market order extension . an uncrossing using the auction algorithm to optimise execution volume or, in the case of an imported price auction, the imported price algorithm
The generic structure is illustrated in figure 2 below. Figure 2: The auction principle
Auction call Auction extension Uncrossing period periods
Throughout each auction call period and any extensions the Exchange disseminates via Infolect™ the most up to date indicative auction price for securities with a crossed book. This will be updated whenever orders are added, deleted, modified or expire and result in a new auction price.
Each auction call period may be followed by zero, one or two price monitoring extensions and zero or one marker order extensions as configured. Specific configurations for each trading service are detailed in the TradElect Parameters document.
Certain period-based order validities will be injected into the book at the start of an auction period and expired at the uncrossing. All remaining market orders are also automatically expired at the end of the uncrossing.
London Stock Exchange Page 23 of 36 Once the uncrossing has completed at the end of the auction call period and any necessary extensions, the order book may revert to any other period as determined by the relevant default period schedule or temporary period schedule (in the case of an earlier automatic execution suspension period).
ORDER BOOK PERIODS – AUCTION CALL PERIODS The auction call period enables participants to represent firm intentions to trade. Orders may be entered, modified and deleted during the period but no automated execution occurs.
The base length of the call period and the length of the random end to the call period are both configurable. Table 15: auction call periods Order validities injected at the start of Auction type period and expired at the end of period ATC ATO GFA GFX Opening auction call -- Yes Yes -- Intraday auction call -- -- Yes Yes EDSP auction call -- -- Yes Yes Closing auction call Yes -- Yes -- Automatic execution suspension period -- -- Yes -- Imported price call ------
ORDER BOOK PERIODS – AUCTION EXTENSION PERIODS Where there are market imbalances, auction extension periods prolong the auction call period to provide the market with more time to react. Participants may enter, delete and modify orders during an extension period but no automatic execution occurs.
TradElect supports two types of auction extension period: . price monitoring extensions triggered by price movements; and . market order extensions triggered by an imbalance of market orders.
TradElect may be configured to support up to three auction extension periods: two price monitoring extensions and one market order extension. These extensions may occur in any order though a market order extension will always take priority over a price monitoring extension.
Price monitoring extensions A price monitoring extension is triggered when at the end of the call period (or any preceding auction extension period) the indicative auction match price is greater than a configured tolerance away from the reference price. Tolerances are set at sector level.
The price monitoring extension consists of an extension to the auction call period of a configurable amount of time. The extra time a price monitoring extension provides draws attention to a potential price movement.
If the indicative price movement still persists after a first price monitoring extension a second price monitoring extension may be triggered (where configured). No further price monitoring extension will occur after the second extension has completed (though a market order extension may follow if applicable).
London Stock Exchange Page 24 of 36 These extensions give participants the chance to review the prices of their orders entered during the original auction call before the auction match occurs. It also gives other participants a chance to enter orders if they deem the price to be reasonable and wish to trade against it.
Market order extension A market order extension is triggered when at the end of the call period (or any preceding auction extension period) the indicative auction match price would result in market orders remaining unexecuted on the order book.
The market order extension consists of an extension to the call period of a configurable amount of time. No further market order extensions will occur after the first market order extension has completed (though a price monitoring extension may follow if applicable).
PRICE MONITORING 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.
Price monitoring assesses the price of each automatic execution as it is about to occur against a dynamic and static reference price. Dynamic reference prices are defined as the last order book trade price observed before the aggressive order was entered. Static reference prices are defined as the last uncrossing price, the first automated trade of the day, or the previous day’s closing price if no automatic execution has taken place on that trading day. Price monitoring can be applied to executions occurring during continuous trading and those resulting from matching at the end of an auction call period.
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.
If the automatic execution suspension period is triggered mid way through the execution of a persistent order, any residual volume is added to the order book.
Non-persistent orders of validity type fill or kill (FOK) that would breach a price monitoring threshold will be rejected and no automatic execution suspension period will occur.
Non-persistent orders of validity type execute or eliminate (ENE) that will breach a price monitoring threshold will result in executions up to and including the first price that breaches the threshold, an automatic execution suspension period being triggered and all remaining volume being eliminated.
The presence of price monitoring functionality in TradElect does not remove the requirement for participants’ systems to have adequate safeguards in place to avoid erroneous order inputs.
Price monitoring thresholds are configured in TradElect by sector and period. Generally, more liquid securities have lower thresholds and less liquid securities have higher thresholds. Additionally, thresholds are generally set higher in continuous trading than in auctions. These are set out in full in the TradElect Parameters document.
Reference prices Two separate reference prices form the benchmark that enables price monitoring to objectively assess whether the execution of an incoming order will significantly change the official price of a security.
London Stock Exchange Page 25 of 36 Price monitoring tolerance limits are set as configurable percentages away from a static base price and a dynamic base price. The static is formed by the last auction or closing price, where as the dynamic is determined as the last automatic trade (auction or continuous trading) or closing price. So at the start of each trading day, both base prices will be the previous closing price.
Please note the Exchange will also set base prices manually if required. This may be done for a new instrument or following a transfer to a new segment or corporate action. A manually overridden dynamic base price will remain in effect until the next complete automatic execution of an incoming order or auction match price from the opening auction.
Exceeding price tolerance levels Figure 3: Illustration of breach of price tolerance level
Any unexecuted part of a limit order triggering an automatic execution suspension (“AESP”) will be added to the order book.
In Figure 4, all parts of the limit order will fill until it reaches the price monitoring threshold. This remaining part of the limit order will be written to the book. Figure 4: Illustration of a mid-execution trading suspension
Price
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X y m
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Time • Order Book Trade Price • Dynamic Threshold Limit
London Stock Exchange Page 26 of 36 In the event of an order with validity type fill or kill exceeding the price tolerance levels the order will be rejected in full. In this scenario no AESP will occur. Please note that an execute and eliminate order can trigger an AESP.
ORDER BOOKS – REFERENCE PRICES
Opening price TradElect supports the determination of the opening price for a security traded on an order book in 3 main ways. The opening price may be derived as: . the uncrossing price of the opening auction . the mid price of any quotes present at the opening . the price of the first executed trade during continuous trading after the opening auction
TradElect can be configured at segment level to support one or more of these approaches in a defined sequence.
Best bid, ask and mid price
TradElect determines the best bid, ask and offer prices from firm orders on the order book.
In the absence of either a bid price or an ask price, the corresponding best bid or ask price is determined as zero and the mid price is determined to be the present best ask or bid price as appropriate. In an empty order book, the bid, ask and mid price are all determined to be zero.
Unpriced orders, which are only present during auction call periods, do not affect the determined best prices but are reflected in the status of the determined prices.
The determination of best prices and the range of applicable best prices statuses are set out in tables 16 an 17 below. Table 16: determination of best price Orders on book Determined best prices Bid Ask Bid Ask Mid Status Continuous trading and auction periods Priced Priced Best bid Best ask Mid F Priced None Best bid Zero Best bid N None Priced Zero Best ask Best ask N None None Zero Zero Zero N Auctions only Priced Unpriced Best bid Zero Best bid S Unpriced Priced Zero Best ask Best ask S Unpriced Unpriced Zero Zero Zero M Unpriced None Zero Zero Zero M None Unpriced Zero Zero Zero M
London Stock Exchange Page 27 of 36 Table 17: best price statuses Status Meaning Continuous trading and auction periods F Firm bid and offer prices N One or both sides of the book empty Auctions only M Only market orders present S Firm bid or offer price and market orders only on other side of book
Closing price TradElect supports the determination of the closing price for a security traded on an order book in 4 distinct ways. The closing price may be derived as: . the uncrossing price of the closing auction . the VWAP price from the continuous trading VWAP period immediately prior to the close . the mid price of any orders present at the close . the price of the last executed trade during continuous trading prior to the closing auction
TradElect can be configured at segment level to support one or more of these approaches in a defined sequence.
The approach for each opening and closing price is set out for each service in the TradElect Parameters document.
London Stock Exchange Page 28 of 36 3 Quotes and market makers
OVERVIEW Quotes represent a two-way (buying and selling) firm offer to trade in a security. TradElect supports quote-driven trading services such as SETSqx and SEAQ alongside order books that incorporate electronically integrated quotes such as SETS.
Market makers are participants who agree to provide two-way liquidity in a security. The name of the market maker is displayed alongside its prices and the market maker may also receive other privileges. The market maker’s obligation to make prices and deal may be firm on book only, off book or both.
Quotes are managed in pairs, though the price and size of each component is separately controlled. TradElect validates both the individual component quotes and the pair. Quotes may be executable (on order books) or non-executable (on quote books).
The way in which quotes are submitted in any security, regardless of the trading service upon which the security is traded, is common as is the treatment of those quotes by TradElect. This section describes that quote functionality.
MECHANISM TYPE AND QUOTE TYPES The Mechanism Type of a quote determines what quote type it is and whether the quote is executable.
TradElect supports two different quote types identified by their associated market mechanism. These are shown in Table 18. Table 18: mechanism type and quote types Mechanism type Quote type Executable EQ Executable quote Y FQ Firm quote N
Executable quote and order books An executable quote is a named pair of executable orders used to display a firm two-way offer to trade on an order book. Executable quotes behave like two independent limit orders (with no expiry) and may execute immediately upon entry, or remain on the book to await passive execution. Executable quotes are disseminated to the market by Infolect using order messages.
In the event that one side of an executable quote is reduced to zero by executions, the other side continues to be valid. In such circumstances, participants may be obliged under the Rules to refresh their quotes. Such a refresh is treated as a modification.
Firm quote and quote books A firm quote is a named non-executable quote. Firm quotes are used in quote-driven trading services where executions take place outside TradElect. Firm quotes are disseminated to the market by Infolect using a quote message.
CONTENT OF QUOTES Quote size and price Both the bid and offered size on a quote on entry must be between the specified minimum and maximum order size for that security. In addition, both sizes must be greater than the minimum quote size. For all securities the quote size must be at least 1*EMS.
London Stock Exchange Page 29 of 36 Both the bid and offer prices on a quote on entry must be between the specified minimum and maximum variation for that security from the reference price for that security.
Quotes that do not meet these price and/or size conditions will be rejected.
Maximum spread The spread between the bid and offer prices must be at least one tick size and no more than the maximum spread specified in the relevant security. When validating maximum spreads the absolute spread (offer less bid) is divided by the mid price of the spread (offer plus bid all divided by 2) to determine a percentage spread which is assessed against the permitted maximum. Quotes that are wider than the permitted maximum spread will be rejected by TradElect.
Capacity and settlement account Every quote submitted to TradElect is considered to be submitted by the participant in a principal capacity.
Each quote must identify the settlement account for any executions. Permitted values are shown in table 19 below. Table 19: settlement account Settlement Account (C)lient (H)ouse (S)tanding MANGEMENT OF QUOTES The entry, deletion and modification of quotes is allowed during the periods specified for each sector.
Quote entry Quotes are submitted as a single message containing price and size information for both buying and selling quotes.
Quote deletion Under normal circumstances, participants may delete individual quotes by specifying the security and quote type for deletion.
TradElect support the mass deletion of quotes in a given segment through the use of basket messages.
Quote modification Quotes are modified by submitting a new quote which updates the current quote. Unlike orders, there is no specific modification message.
Modifications of a quote may result in a change in its price and/or time priority as set out in table 20 below. Table 20: impact of quote modification on quote priority Modified field Modification Impact on priority Bid or offer size Increase Loses time priority Bid or offer size Decrease Loses time priority Gains price priority Bid or offer price Improve Loses time priority Loses price priority Bid or offer price Worsen Loses time priority
London Stock Exchange Page 30 of 36 Amending only one side of a quote does not affect the price/time priority of the unchanged side.
With executable quotes, amending the price of one or both sides will result in the relevant order(s) being resubmitted to the order book at its (their) new price(s). Where any new order is able to immediately execute, the resultant executions are considered aggressive executions by the modified quote.
The size of a quote is amended by entering the desired new absolute size (not, as is the case with orders, the relative size change). If the desired amendment reduces the quote size to zero the quote will be deleted.
Basket messages TradElect supports the entry or deletion of multiple quotes in the same segment using a single ‘basket’ message. On receipt, the constituent quotes in the basket are processed and acknowledged individually.
Due to the parallel nature of the trading system it is not possible to guarantee the sequence that messages in different securities will be processed within each basket.
Basket messages are used only in private communication between a participant and the Exchange. The use of a basket message is not publicly disseminated and each constituent message will be individually broadcast.
Basket message functionality is not available with legacy message versions
QUOTE BOOK PERIODS Pre-mandatory quote period Firm quotes can be entered and deleted before the commencement of the mandatory quote period, market makers are not bound by them for the duration of this period.
Mandatory quote period A Market Maker must maintain firm quotes in all its registered securities that are not suspended and be bound by them as per Rules.
Post mandatory quote period A Market Maker may remove quotes from any or all of its securities, if quotes remain they are Firm. If a market maker re-opens quotes in an individual security it is obliged to remain open in that security until the end of the Post Mandatory quote period.
QUOTE BOOKS – REFERENCE PRICES
Determination of opening price TradElect determines the opening price for a security traded with firm quotes on a quote book to be the mid price of quotes present at the opening.
Determination of closing price TradElect determines the closing price for a security traded with firm quotes on a quote book to be the mid price of quotes present at the close.
London Stock Exchange Page 31 of 36 4 Trade reporting OVERVIEW Trade reports are automatically generated by TradElect for executions directly on an order book.
Where the trade is executed away from an order book (but possibly still in an order book security) a ‘manual’ trade report must be submitted to TradElect in order to bring the execution ‘on Exchange’. Manual trade reports can also be submitted to the Exchange in its capacity as a trade reporting venue. Trades are reported as OTC using the specified trade type.
The TradElect Parameters document sets out the required content that needs to be provided for each execution, including the trade type and bargain condition. It also shows the mapping of trade types to Execution Venue (Venue ID), which publishes to show where the trade was executed.
Trade reports are published in accordance with the publication criteria for the relevant security. Delays in publication may be available on request for manual trade reports for business of a certain size and/or nature, however in the absence of a specific request for delayed publication, trade reports will typically be published immediately. In the case of automatically generated trade reports publication delays are managed by TradElect in line with the parameters relevant for that specific segment. Customers are able to override any automatic delay in order to force immediate publication if required.
Capacity Paragraph 3040 of the Rules of the London Stock Exchange requires that every trade report submitted to TradElect must identify the dealing capacity of the participant submitting the trade report. Permitted values are shown in table 21 below. Table 21: capacity Capacity (A)gency (P)rincipal Riskless(S) principal TRADE REPORT VALIDATION
Eligible trade types for segment The range of trade types that any participant is able to submit in any given security is defined by the roles that the participant is registered in for the relevant security. Trade reports containing trade types for which the submitting participant is not registered will be rejected.
Reporting party and counterparty The reporting party and counterparty on a manual trade report must be distinct. Trade reports with the same counterparty as buyer and seller are rejected.
Price validation TradElect validates all incoming trade reports against a defined tolerance around the previous closing price. Trade reports containing prices outside of this range will be rejected.
London Stock Exchange Page 32 of 36 AMENDING TRADE REPORTS
The Rules of the London Stock Exchange require trade reports containing inaccurate data in certain fields to be promptly corrected.
Off order book trades may be cancelled by mutual agreement between the counterparties and the associated trade report should be cancelled.
Automatic trade reports cannot be cancelled. However, an equal and opposite contra trade may be created by mutual agreement, effectively reversing the original trade. There is no obligation for the counterparty to an automatic trade to agree to a contra trade.
The correction, cancellation and contra processes are described below.
Manual trade reports – corrections and cancellations The process for cancelling or correcting a trade report depends on how soon after publication (or, in the case of trade reports that are not published, submission) the amendment is to be processed.
When submitting an amendment within 3 days of publication (or submission) the process is: . cancel the original trade report by submitting a cancellation message using the original trade code . if correcting, submit a new trade report containing the corrected details.
When submitting an amendment more than 3 days after publication (or submission) the process is: . submit a new trade report with trade type indicator ‘LC’ containing the details of the original (incorrect) trade report. . if correcting, submit a new trade report containing the corrected details.
Automatic trade reports –contras A contra may be requested by one party to the trade. For electronic executions in CCP securities, due to counterparty anonymity, agreement to contra can only be secured by the Exchange’s Market Supervision team intermediating. For non-CCP executions the member firm may contact its counterparty directly.
Member firms are under no obligation to contra a trade at the request of a counterparty.
Same day contras The party wishing to contra the trade must submit a contra request to the Exchange using the cancel trade message. On receipt of a request, Market Supervision will contact the requesting party to ascertain the reasons for its submission. Market Supervision may then contact the matched buyer or seller to pass on the contra request from the initiator. If the other party agrees to the reversal of the trade it must itself submit a contra request.
The possible values on the contra status field within the cancel trade message are:
N - not contra'd (the default setting) B - contra requested by buyer S - contra requested by seller C - trade contra'd
On receipt of the second request, Market Supervision will contact the original requesting party to confirm that the trade has been cancelled.
London Stock Exchange Page 33 of 36 For AT trades, a cancel trade report message is automatically generated.
For UT trades, once a contra request has been received from both parties a contra trade report is automatically generated with the trade type indicator CT. This is necessary as the automatic trade that has been reversed was initially broadcast as part of an aggregate uncrossing trade and was not individually identifiable. All details on the contra report (e.g. trade price, size, time, etc) will be identical to those on the original report except that the parties' buy or sell action will be reversed from that stated on the original trade report.
Contra after trade date Contra request messages will not be accepted by TradElect after the trade date. Should a member firm wish to reverse a trade after that date it should contact Market Supervision on stx 33666 option 2, who will liaise between the two counterparties and advise whether each party is prepared drop its anonymity and contra the trade. Any contra trade resulting from the request will be published to market using trade type PC as an exact reversal of the original trade. The responsibility for submitting the contra trade report should be in accordance with the trade reporting responsibility
If, as part of the contra agreement, the counterparties agree to proceed with executing a portion of the original trade, this trade should be executed and settled bilaterally and trade reported as per any other manual trade.
DUAL-SIDED TRADE REPORTING TradElect supports dual-sided trade reporting but this functionality is not currently used in any of the markets operated by the London Stock Exchange and is therefore not included in this guide.
TRADE PUBLICATION There are 4 main publication regimes in operation on TradElect as set out in Table 22.
Table 22: Delayed publication regime Based on Description Securities PTS / ADT Most Domestic and International equity Non-publication of Transactions over £50k Gilts Elective 24 hour delay Fixed interest
No delay Modified SETS
Further information is available in the TradElect Parameters document.
London Stock Exchange Page 34 of 36 5 Market situations
OVERVIEW The Exchange may be required to suspend automatic execution on TradElect, impose a temporary trading suspension or trading halt for a particular Trading Service, trading segment, trading sector or tradable instrument as market situations dictate. The market will be notified and updated as the situation unfolds by Service Announcement and via the Incident website, available at: www.londonstockexchange.com/incident_website
There are 4 levels of Exchange intervention which may be used:
Pause In order book securities, this acts like an auction call, although no indicative uncrossing price is disseminated. Orders can continue to be entered and deleted.
Market Suspension Designed to be used when there is a need to temporarily halt trading but trading is expected to be resumed. No orders or quotes can be entered or deleted during this period.
Halt Designed to be used when there is a need to temporarily halt trading but trading is expected to be resumed. Orders and quotes may be deleted but not entered.
Halt & Close This freezes and disseminates a closing price so is designed to be used where there is little likelihood of returning to trading that day. No orders or quotes can be entered or deleted during this period.
Table 23 sets out the 4 levels of Exchange intervention and the impact on order and quote securities. Table 23: market situations order book order / quote order / quote Dissemination of execution entry deletion closing price PAUSE order driven Suspended YES YES NO quote driven N/A NO N/A NO MARKET SUSPENSION order driven Suspended NO NO NO quote driven N/A NO N/A NO HALT order driven Suspended NO YES NO quote driven N/A NO N/A NO HALT & CLOSE order driven Suspended NO NO YES quote driven N/A NO N/A YES
Resumption of Trading Trading will be restored when the market situation has been resolved. Order driven securities trading will recommence with an auction call. Quote driven will recommence with a pre-mandatory quote period. The duration of theses periods will be determined according to the specific circumstances at the time.
London Stock Exchange Page 35 of 36 6 Further Information
The Rules of the London Stock Exchange http://www.londonstockexchange.com/traders-and-brokers/rules-regulations/rules- regulations.htm
The TradElect Parameters document http://www.londonstockexchange.com/tradingservices
Technical Library http://www.londonstockexchange.com/information-providers/technical- library/home/technical.htm
Account Manager
If you have any specific business or functionality questions concerning any of the Exchange products described in this guide please contact your Primary Account Manager.
London Stock Exchange Page 36 of 36