JP Morgan Fined By London Stock Exchange

JP Morgan has been fined £350,000 by the London Stock Exchange (LSE) following attempts by two equity derivatives traders to lower the FT-SE 100 index by shorting individual stocks. The bank has sacked the two traders involved and tightened its trading supervision procedures in the wake of the incident.

A spokesperson for JP Morgan says the bank co-operated with the LSE's investigations and has agreed to the £350,000 fine. The two rogue traders were "terminated" at the end of last year, adds the spokesperson.

JP Morgan has also implemented new guidelines to prevent a repeat incident. "The principal change is to have senior managers in the equity group review trades on days when

OTC options expire," says the spokesperson.

The LSE's investigation was sparked by a sudden drop in the FT-SE 100 index at the close of trading on November 28 last year (RMO, December 15, 1997).

An exchange spokesperson says the traders breached paragraph 2.10 of the LSE's rules. This paragraph states: "A member firm trading in a security that is the component of an index shall not do any act or engage in any course of conduct the sole intention of which is to move the index value."

The spokesperson adds that the exchange "recognizes the prompt and thorough reaction" of JP Morgan and "acknowledges the full co-operation and assistance provided by the firm".

The LSE spokesperson adds that the incident at JP Morgan is the first of its kind. The exchange recently switched to a new electronic order-matching system that facilitates rapid execution of block trades, says the spokesperson: "Previously it was more difficult to do a basket trade in such a quick time."

Such basket trades are popular with index arbitrage traders, and the LSE spokesperson stresses that there is "nothing wrong" with such trades in principle.

But the LSE's surveillance systems pick up on large market-moving trades -- especially on days when index futures and options contracts are due to expire. In the case of JP Morgan, an LSE investigation concluded that the traders had shorted stocks in order to lower the value of the FT-SE index.