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HMRC internal manual

Stamp Taxes on Shares Manual

From
HM Revenue & Customs
Updated
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Financial markets: issue and trading of shares: electronic order-book trading of shares

The London Stock Exchange (LSE) runs two electronic order-book systems -

  • SETS (Stock Exchange Electronic Trading Service), and
  • SETSqx (Stock Exchange Electronic Trading Service - quotes and crosses).

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SETS

When first introduced, in October 1997, SETS was used for the top 100 or so companies (FTSE 100) only, but over time its use has been extended to cover a variety of securities.

Acting on the instructions of the client the broker will input the order to buy or sell securities.

There are four order types that can be placed on SETS:

  • At best price order, where no price limit is set for the order. The order will execute immediately as far down the order book as necessary. Any unexecuted portion of the order is rejected.
  • Limit orders, where a price limit is set - either a highest price at which a buyer is willing to buy or lowest price at which a seller is willing to sells. Where a matching order is already on the system the order will execute immediately. Any unexecuted portion is placed on the order book. Orders are generally placed with a time limit, which can be up to 90 days.
  • Execute and eliminate order, where a price limit is set and the order executes immediately as far as possible, with any unexecuted portion being rejected.
  • Fill or kill order is all or nothing: it either executes in full immediately or it is rejected.

Best price orders are executed first and where there is more that one order the oldest will execute first. The best price for an order book security is:

  • the highest bid price on the order book for that security, or
  • the lowest offer price on the order book for that security

All orders on the order book are anonymous although immediately following execution, the identity of the counterparty is revealed to both trading parties, but not to the market as a whole.

As an alternative, brokers may contact each other by other methods, e.g. by telephone, to arrange a share deal.

A broking firm may also be able to match a client selling securities with another client who wants to purchase the same securities. This is called an agency cross (STSM126010).

All trades that result from orders placed on SETS are automatically reported for regulatory purposes. The trades must also be ‘settled’, that is to say that the shares must be transferred from the seller to the buyer and the payment for them must pass in the opposite direction. This is known as ‘delivery versus payment’ or DVP. Settlement of the vast majority of UK shares trades is carried out in the CREST system operated by Euroclear UK & Ireland (see STSM130000 for a detailed explanation of the operation of the CREST system).

SETSqx

SETSqx is used to trade securities that are less liquid than those traded on SETS. It combines a limited electronic order book, similar to SETS, with a non-electronic quote driven facility.