FTSE swings wildly due to hectic derivatives trading

Shares worth a record £3.2 billion (€5 billion) changed hands in London yesterday morning during a breathless 20 minutes linked to hectic derivatives trading.

Britain's FTSE 100 blue-chip share index swung wildly in morning trading, surging more than 250 points before losing all its gains in a dizzying spell.

The blue-chip index closed up 46.6 points or 1.2 per cent at 3,860.1, breaking a three-day losing streak but still finishing down 148 points on the week. In Dublin the ISEQ closed up 0.1 per cent, a fall of more than 2 per cent on the week.

In New York, the Dow Jones closed up 43.63 at 7,986.02.

Dealers blamed the volatility on the expiration period for LIFFE September futures and options contracts between 0910 and 0930 GMT.

But the head of derivatives trading at one broking firm said: "It was the most frantic expiry I've known in 20 years and it smacks, no, screams of manipulation."

Mr Chris Broad, head of broker services at the London Stock Exchange, said: "We're very comfortable from a supervisory angle that all the trades that took place were good trades."

An London Stock Exchange (LSE) spokesman said a record 40,000 automatic trades - amounting to slightly more than one billion shares - took place during the 20 minutes. The previous record period linked to futures expiration was in June, when 28,000 automatic trades took place, worth £492 million.

The FTSE index rocketed as high as 4,064 points - up more than 6 per cent - and then raced back down to a low of 3,755 in the expiration period.

The biggest mover appeared to be investment vehicle 3i, which rocketed 92 per cent to 871p before surrendering almost all the gains and dropping to 460p. Other wild swings included a 34 per cent price spike by aerospace company Rolls-Royce and a 66 per cent surge by software firm Sage Group. Dealers noted talk that price spikes may have been due to at least one erroneous transaction taking place during the expiration period. Several dealers said Credit Suisse First Boston (CSFB) had input an incorrect trade. "We decline to comment on trading rumours," a CSFB spokeswoman said.

Other dealers blamed the volatility on the huge amount of shares traded, and it is understood the LSE did not receive any requests to cancel any trades.

Investors had braced for a volatile morning because prices usually see-saw near the expiry of derivatives contracts. But the wild swings were the biggest seen for futures expiration since the advent of electronic share trading.

Mr Nick Carew Hunt, market secretary at derivatives exchange LIFFE, said the volume was due to volatility in the stock market in recent months, creating greater scope for arbitrage trading between the cash and futures markets, plus greater liquidity and trading of futures and options contracts.

Investors had built up big positions in futures and options markets and were using the underlying shares to close out their contracts.