Jiri’s Notepad

A good story (with a sad context) from my readings of and old Telegraph:

An LCH Clearnet official explains. “We act as a central counterparty to, amongst others, trades on the electronic order book of the London Stock Exchange, trades on the International Petroleum Exchange, on the London Metals Exchange and on Euronext Liffe.

We also clear fixed-income trades which are executed over the counter and our sister companies do the same for markets in Paris, Lisbon, Brussels and Amsterdam.”

Anyway, the worst happened after the blast on the eastern edge of the City at Aldgate: LCH Clearnet found itself evacuated from its premises.

“As soon as it became clear - and it did so pretty rapidly after the 8.50am incident that we weren’t going to be able to go back into the building - we invoked our disaster recovery plan,” the official says.

“We have had for a long time a disaster recovery plan: we revise it and update it and we rehearse it pretty regularly. Thursday was the first time that we’ve had to put it into action,” he adds.

“Our plan calls for us, in the event of us being evacuated from the building for whatever reason, to transfer key staff to our back-up site, which is elsewhere in London. The back-up site is fully kitted up to run our services from there and we carry on as normal. In fact, we cleared very, very large numbers.”

With the area around Aldgate turned into a crime scene, LCH was not allowed back into its offices on Friday and continued to operate from its back-up facility � whose location is a secret to minimise the risk of it becoming a terrorist target.

Meanwhile, there was also a problem at the London Metals Exchange, home to the last open outcry trading floor in London.

“We didn’t have floor trading on Thursday. People couldn’t get into and out of the building because we were in a police exclusion zone,” an executive at the LME says.

“So all trading had to be conducted on the electronic trading system, LME Select, and on the telephone.”

He says the board of the LME, in consultation with the trading groups that use the exchange, decided not to move to back-up premises and to rely instead on electronic trading systems.

“We do have a disaster recovery policy and a disaster recovery site but decided not to deploy it,” the executive says.

“We were working on information as it came in and we were told the police cordon could be lifted at any time. Therefore, it wasn’t sensible to start major transfers to the recovery site.”

All the while, the tripartite committee was monitoring the situation and talking to the banks, the Stock Exchange and other City institutions.

“If there was a physical problem at one of the infrastructure providers then that would be a real problem,” a Government official says.

As well as keeping tabs on the infrastructure, the committee keeps a beady eye on how the markets are trading.

“The committee assesses whether anybody has been affected by movements in markets, in confidence in the sector, or whether there are patterns of behaviour that might be dangerous,” the official says.

The stock market was acting abnormally, with orders for a huge volume of small trades pouring in. The LSE moved to contain the situation by declaring a so-called “fast market”.

An LSE executive elucidates: “A fast market is a term that has origins in the market itself. It just means there’s a lot of volume and big movements in the indices. When we call a fast market, we bring certain procedures into place.”

These procedures relieve market makers of the obligation to trade at the prices they quote on screen. Normally, the market makers declare a buyer’s and a seller’s price and are obliged to make trades at those prices.

In a fast market, they declare a single price, which is deemed indicative rather than binding.

“The second thing we do is ask the market participants to turn off computerised trading facilities,” the LSE executive says. “These are computer-generated orders created by algorithmic models without any human intervention. They could create difficulties for a firm’s systems and problems for the market.”

What he means is that if trades are being automatically triggered by the computerised systems, a sharp downward lurch in prices could be exacerbated.

Never before has the LSE asked for these computers to be shut down. But even after taking this emergency action, Thursday was one of the busiest days on record, in terms of the volume of trades. However, no financial damage was done by the frenzy. Or, at least, no institution’s losses posed a threat to the system - which is what matters.