Notices

SETS

From Traderpedia

Definition:
Stock Exchange Electronic Trading Service.


Launched in 1997, SETS (Stock Exchange Electronic Trading Service) is the London Stock Exchange's trading service for UK blue chip securities. SETS is an electronic order book that can execute hundreds of trades a second. Securities traded on SETS include all the FTSE 100 constituents reserves, the most liquid FTSE 250 securities along with some other securities.

[edit] How does it work?

SETS is an automated market where buy and sell orders are listed on the bid and offer. Whereas Level II for SEAQ represents a list of a number of market maker firms prepared to buy or sell, SETS Level II lists specific orders. These orders can be lodged by anyone with direct market access, including traders, brokers, market-makers or even trading programs.

You can imagine the SETS order book as two piles of paper. One of buy orders and one of sell orders. You can take from each pile or add to them, depending on how you want to trade. If for example you have a sell order which is the same as an order on the bid, the orders will be matched and filled. In other words you would have sold the shares at the price of the best bid order and the amount of stock you sold will be removed from the buy side of the order book. Matching is purely the act of a buy and sell order being at the same price. When a buy and sell order are matched this transaction becomes a trade which is then registered and transmitted to the market.

The SETS order book has a bid column and an offer column just like the SEAQ book, except that these offers are orders from the market rather than a group of market makers. A buyer or seller with access to the SETS book can put a buy or sell order into the book at any price and this offer is limited to the volume of shares he wishes to trade. He could for example put a sell order in at a high price and at the same time put a buy order in at a low price level. As these prices would be worse than the best bid and offer, they would sit in the order book waiting to be filled by a change in price. The price change and volume of demand will determine when and if these order will be filled.

The price of a stock is set at the price of the last transaction which can be either the cheapest in the offer column or the most expensive in the bid column. The official price of a SETS stock is the last AT trade which is the trade type of a SETS transaction. The spread is determined by the gap between the highest unfilled bid order and the lowest unfilled offer order.

The SETS book operates by orders being taken off the book by a trade meeting its price and by the placing of orders into the book to await a party to accept the price of that order. In this way an order book builds up for a stock both on the buy side called the bid and the sell side called the offer. A share may have a bid/offer spread of 9p and 10p but there will also be customers wanting to sell at, for instance, 11p or buy at 8p. As demand and supply fluctuates for a share, so the bid and offer will change. While the bid and offer price will be affected by buys and sells it will also be affected by new orders or by the withdrawal of old orders.

Orders can be entered into the book but they can also be removed by deletion. The sell order at 11p may sit on the book while the offer price falls to 9p. The 11p offer might then be deleted and re-entered at 9.5p or if the customer was keen to sell, at 9p where it is likely to be filled. The order alternately might take the bid price of 8p and if there is enough volume at the bid to fill the order then order would not appear in the book at all.

Because SETS is an automated system it is felt that only liquid stocks with a large number of daily trades to be executed are suited to the system. This means that SETS stocks are mainly the biggest companies listed on the LSE.

The automated nature of the system and the volume of orders processed means that the spread in a SETS stock can be wafer thin. Whereas a big SEAQ stock might have a 2% spread, a small SETS stock like Whitbread will have a spread of 0.2%. The impact of this dramatically lower trading cost and greater liquidity attracts traders as they have a smaller hurdle to leap to make a profit in trading SETS stocks.