Joint release by the Securities and Futures Authority and the Financial Services Authority on: the increase in share trading volumes

Those firms that are facing difficulties are taking action to deal with the problems, and the regulators will continue to monitor developments.

Investors in smaller company stocks need to be aware, when deciding whether or not to invest, that these stocks can often be illiquid and difficult to trade.

Excess demand faced by some firms

Since early November there have been exceptionally high volumes of equity trading by private clients. To date, the dealing and settlement infrastructure has coped adequately overall with the upsurge in volumes, but some investors trying to deal through certain companies that use call centres have experienced delays in placing orders.

It is in the commercial interests of firms, as well as in investors interests, to resolve any difficulties as quickly as possible. It would not be reasonable to expect a firm to cope immediately with the sudden trebling or quadrupling in volumes faced by some firms, and firms are taking rapid steps to adjust their businesses to cope with the demand. The FSA on behalf of the SFA has emphasised to firms that they must address any current difficulties, and put in place further contingency arrangements in case the current level of demand should continue or increase.

Lindsay Thomas, Head of SFA Firms Supervision Department at the FSA, said:

"It is important that firms put in place systems adequate to handle the new peak levels of business that they should now expect. The SFA and FSA will, where appropriate, seek undertakings from individual firms that they will prioritise services to existing customers who are reliant on the firm. We have reminded firms of that. Investors can take their business elsewhere if their existing broker lets them down."

Message for investors

The upsurge in demand is partly due to a number of investors new to the market, who are particularly interested in smaller, new technology companies. Investors must recognise that these smaller stocks, by their nature, can often be illiquid and thus subject to volatile price movements. When forming their investment strategies, investors should take into account the impact that a possible lack of liquidity could have on the timing and the price at which they might be able to buy and sell shares both now and in the future.

Christine Farnish, Director of Consumer Relations at the FSA, said,

"Consumers investing their money in smaller company shares need to know that the prices of those shares can be very volatile both up and down. They need to think carefully about the risks involved before deciding what shares they buy and how many."

The role of the regulators

In its ongoing regulation of firms, the FSA, on behalf of the SFA, requires firms to maintain reasonable standards of service for their existing customer base. The FSA is thus seeking action from firms, where necessary, on the following points:

Firms must prioritise providing a reasonable service for customers who are "tied in" to executing through that firm because, for example, their cash is held by the firm, or their stock is registered in the firms nominee company. This may require the provision of separate phone lines to provide access for such customers, and the re-allocation of resources to prioritise the provision of services to them.

Firms must continue to maintain control over order processing and settlement. They must have the back office capacity to cope with the number of orders they accept.

Firms must explain to their customers the service levels they aim to provide both in terms of expected normal standards and any special arrangements which may be needed during exceptionally busy periods.

If serious cases should emerge where a firm lost control of its order processing or settlement, the regulators would take formal action, such as limiting their business.

Notes for editors

SFA is the regulatory organisation established under the Financial Services Act 1986 with responsibility for regulating members of all the organised City investment markets, i.e. the stock market, eurobond, financial futures, commodity futures markets and also corporate finance specialists and off-market traders. Around 1,350 firms are regulated by the SFA.

The FSA currently provides a regulatory service to SFA under a Service Level Agreement. Similar arrangements apply to the FSAs relationship with other financial regulators. This arrangement is designed to integrate the various regulators as far as possible under existing legislation, until the implementation of the Financial Services and Markets Bill. This new legislation will make the FSA the sole financial services regulator for all the areas regulated by these existing regulators.

The Financial Services and Markets Bill received its Second Reading in the House of Commons on 28 June and is expected to receive Royal Assent in the first half of 2000.