Stock Exchange imposes record pounds 350,000 fine on JP Morgan for mani pulating the FTSE 100

The Stock Exchange last night handed out a record pounds 350,000 fine to the US investment bank JP Morgan, after two traders tried to manipulate the market. To try to prevent further abuses, the Exchange is to intervene directly in New Year's Eve trading and has clarified its position on market manipulation. Lea Paterson reports.

JP Morgan yesterday announced it had fired the two traders who attempted to drive down the level of the FTSE 100 towards the close of trade on Friday, 28 November.

The bank said in a statement: "JP Morgan has concluded its internal investigation into the matter and two individuals have been terminated in its London office." A spokesman declined to name the individuals involved.

The Stock Exchange yesterday imposed a record pounds 350,000 fine on the US bank after concluding its traders had acted with "the sole intention" of moving the FTSE 100, in breach of Exchange rules.

The last time the Exchange fined a member firm was in March 1994, when J&E Davy, an Irish stockbroker, was fined Irpounds 150,000 (pounds 133,000).

The Stock Exchange said last night its investigation into the matter was now closed.

At the beginning of this month, the Exchange announced it was to look into unusual trading patterns at the end of November. In the closing moments of trade on 28 November, the FTSE 100 dropped more than 30 points after substantial falls in the shares of Glaxo Wellcome and SmithKline Beecham, the pharmaceutical giants.

The two JP Morgan traders are thought to have taken advantage of late afternoon illiquidity in Sets, the Stock Exchange's new order-driven trading system, to drive down the level of the FTSE 100. The traders are understood to have been hedging an over the counter options contract.

In a separate development aimed at solving the problem of rogue closing prices on New Year's Eve, the Stock Exchange announced yesterday it would not allow share prices to be determined solely by the forces of demand and supply on 31 December. Instead, Exchange statisticians will analyse closing prices for each FTSE 100 stock and will disregard prices they deem "exceptional".

Under Sets, traders type into an electronic order book the number and the price of shares they wish to sell (or buy). The orders then remain on the book until they are matched with an equivalent buy (or sell) order, at which point the trade is executed.

Late in the afternoon, traders tend to remove non-executed orders from the book to avoid being caught out by overnight developments in the US and in the Far East. This means that prices on the order book at this time can be unrepresentative of the day's trade. As the last trade executed gives a share's closing level, trades executed in the late afternoon can give rise to so-called "rogue" prices.

To try to solve this problem on New Year's Eve, a day when closing prices are used for fund valuations, the Exchange has calculated the average volatility of each FTSE 100 stock on a normal's day trade. On 31 December, the Exchange will take the price given by the last trade in each stock, and compare it with that stock's average volatility. A price deemed to be out of line with normal trading prices will be disregarded for the purposes of calculating closing values.

Closing prices, both for shares and the FTSE 100, will be calculated from the last trading price that satisfies the "normality" test imposed by the statisticians.

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