9.4 The Stock Exchange Electronic Trading Service (SETS)

Question 1

What is the Stock Exchange Electronic Trading Service (SETS)?

Answer 1

The Stock Exchange Electronic Trading Service (SETS) is the central trading mechanism for the constituents of the:

• FTSE All Share index
• The most liquid AIM shares
• Some euro-denominated Irish securities

Question 2

What kind of system is the Stock Exchange Electronic Trading Service (SETS)?

Answer 2

It is an order based system but also enlists markets makers to increase liquidity.

Question 3

Who can place orders on the SETS order book?

Answer 3

Only member firms authorised to use SETS can place orders on the SETS order book

Question 4

On whose account can orders be made?

Answer 4

Either for the member firm’s own account or on behalf of clients.

Question 5

Who is able to view the order book?

Answer 5

Anybody is able to view the order book to see the orders being placed.

Question 6

What happens once an order has been placed on the order book?

Answer 6

Once an order has been placed on the order book, it will automatically be matched against a corresponding order. If there is no such corresponding order to match against, the order will either stay working on the order book for future execution or will be returned (in full or in part) to the member who originally entered the order, depending on the type of the order.

Question 7

Explain the 5 key points of the SETS trading day?

Answer 7

1. The automatic trading in SETS securities runs from 8 am to 4.30 pm each business day (‘normal market hours’). The system is open before and after the automatic trading period for reporting and auction periods.
2. The opening of the market is preceded each day by a 10 minute AUCTION CALL PERIOD, running from 7.50 am to 8 am. This allows member firms to enter orders onto the order book without automatic execution taking place.
3. At 8 am a matching algorithm is run by the system which calculates the opening price of the security.
4. The Intra-day auction provides a price forming liquidity event at a time of low volume. Many funds use midday London prices to fix their benchmark prices for investors.
5. Normal trading activity then continues until 4.30 pm. When trading stops at 4.30 pm, there is a 5 minute closing auction call period, similar to the opening one, which establishes the closing price of the security.

Question 8

Explain the SETS trading screen?

Answer 8

• The SETS screen represents an electronic medium for expressing interest in a particular share; in this example, Tesco plc. It divides into two halves: the bottom half which includes the middle, or touch, strip and the top half.
• The bottom half represents a list of typically anonymous orders to buy (on the left-hand side) and sell (on the right-hand side).
• Order management is by price (primary factor), and then time (secondary factor). Better priced orders are placed higher on the screen, and will be matched and executed sooner. If two orders are placed at the same price, the earlier order is placed higher.
• The market price, or best price offered by the order book, is repeated in the touch strip, i.e. 210-214 for Tesco plc in this example. It is the highest priced order to buy (bid) and the lowest priced order to sell (offer).
• If no orders to buy and/or sell are input into the SETS order book, the best bid and/or offer is displayed as nil.

Question 9

What happens during continuous order book trading?

Answer 9

Many orders can be placed on the order book during continuous order book trading.

Question 10

What are the most common orders placed on the order book?

Answer 10

Limit orders and market orders

Question 11

Explain a limit order

Answer 11

A limit order specifies the volume of shares to be traded and a limit price (a ‘no worse than’ price).

Question 12

What does SETS do when a limit order is placed?

Answer 12

When the order is placed, SETS will determine whether the order can be matched (or executed) against another order recorded on the system. Any unexecuted portion of the order is added to the order book to await subsequent matching.

Question 13

What is the usual order type executed during the continuous trading period?

Answer 13

During the continuous trading period, a limit order is normally the only type of order that will be seen on the order book.

Question 14

What is an at best (or ‘market’) order?

Answer 14

An at best (or ‘market’) order only specifies a volume of shares to be traded. It does not specify a price. An at best order requests that a specified volume of shares be executed at the best price currently on the order book.

Question 15

What is the best price from a seller’s point of view?

Answer 15

The best price from a seller’s view is the highest buy price shown on the order book.

Question 16

What is the best price from a buyer’s point of view?

Answer 16

From a buyer’s point of view, the best price is the lowest sell price shown on the order book.

Question 17

How will an at best order execute?

Answer 17

As with an execute and eliminate order, an at best order will execute, in full or in part, against eligible orders on the order book, and any unexecuted part of the order will be rejected from the system.