London Stock Exchange SETS mm

A big change for small share investors, which seems to have gone unnoticed by many, is taking place on 11 July. That is, around 200 new shares are being added to the SETS mm list.

What does that mean and how will it affect trading in smaller companies?

Well, instead of the share prices of smaller companies being set by market makers alone, others will also be able to place orders electronically. "So what?!" You might ask. Isn't that good news?

The LSE thinks so. It reckons spreads will be reduced, but my guess is spreads will actually widen, especially earlier in the day.

I can give you an example. A share I trade a lot, Kier Group, very recently changed from being a market maker stock to only a SETS mm stock. Before the change, the spread at most times of the day was 2p to 7p. This made Kier a good trading stock and a nice tight spread at all times of the day.

After the change? Mayhem! Instead of starting the day at say 900p to 905p, it could easily be 897p to 925p; a huge difference!

Sometimes, usually in the middle of the day, the spread does reduce to 4p or 5p, but this can widen dramatically in a few seconds, leaving unwary investors to buy at a silly price. Why does this happen? Because when a stock goes SETS mm, the market-makers simply widen their spreads to 'allow' other orders to come in. But if these orders dry up - and I can promise you they will in the smaller stocks - the spread suddenly becomes very wide.

My feeling is, generally, the new market will mean timing will be very important. My guess is it will be best to avoid trading very early on, and traders will have to be on their guard ready for the spread to narrow - at which point it would be the right time to buy.

Premium bulletin board contributor to my discussion forum, MT Glass, I think sums up investors' feelings quite well with this recent posting:

• I am among those who see it as a bad move for some of the quieter stocks. This combined SETS mm system will allow some very sneaky manipulation by mms who will stand well away from, what is meant to look like, a small handful of other players' orders, but may sometimes be orders temporarily posted by mms (or friends of) for a purpose, and pulled as soon as the purpose is fulfilled.
• Those quotes will give a false impression of tighter spreads but will be for such tiny and temporary quantities as to be rendered useless and misleading. Those who get taken in will then find themselves quickly stopped out when the (supposed) non-mm quotes evaporate, leaving only the visible mm quotes.
• Not such a problem on the busier stocks where such antics are usually swamped by genuine stuff, but things are progressively worse in the lower rankings of the system. The system does set a maximum spread (5 percent on some stocks, and 10 to 15 percent on others), which sounds good, but even 5 percent will be a shock to some punters taken in by the (say 1 percent) spread used as bait - especially for those who took out leveraged positions via spreadbets etc.
• As long as the manipulation is not too blatantly obvious, the chances are that a blind eye will be turned, or that sufficient evidence will ever be available to bother doing anything. Skilled players (now muttering "Shush - don't rock the boat!") might be able to join in and exploit the situation, but the innocent punters will be left scratching their heads and peppering the bulletin boards with questions about, "what is going on with (whichever) stock?" Some of the apparent additional trading (which the LSE says will be created), will be punters jumping ship after being hooked."

Some interesting points from MT: it remains to be seen exactly what happens after SETS mm is extended, but I, and many other traders, will be keeping our beady eyes on this. To be fair, sometimes new systems need time to bed in - and I'll report back here with my feelings in late July.

I'd be interested to know, after the new system comes in, how you feel your favourite stocks have been affected. E-mail me at robbiethetrader@aol.com with your views on all this.

It's been a good couple of weeks for trading in small and mid caps. In particular, Burren Energy, has moved very strongly upwards for me - up more than 100p!

And some good news from one of my biggest holdings, Costain. It's won a huge contract for work in Iran, which has pushed the share price up nearly ten per cent. I haven't taken profits because I don't believe this deal is yet reflected in the price.