Triple witching hour set to spook City

IF YOU are still under the impression that this is the season of goodwill, it might be best to give the stock market a wide berth on Friday for the triple witching hour. This marks the expiry of the December series of index options, index futures and stock options which is sometimes responsible for wild movements in share prices as institutions and traders rush to unwind their open positions.

It can result in the London Stock Exchange's computerised trading systems being stretched to the limit. In the past it has also led to charges of market manipulation. This occurs when a daft bid, or offer, is entered into the computer by traders hoping to take advantage of wild price movements.

This week the Financial Services Authority told brokers to warn their clients about the possibility of volatility in the market-place during the half-hour it takes to complete the triple witching.

During the last one in September, a dozy trader at one of the big American houses added to the confusion by pressing the wrong keys and turning a $3m sale programme into a $3bn operation. During the next few minutes the FTSE 100 index endured a 306-point swing as a record £4.6bn worth of shares was traded. The system almost ground to a halt. One European house is reckoned to have lost more than £100m.

The picture this time will be clouded by the recent sharp fall in share values. Most pension funds and life assurers have moved to counter that in recent months and hedged their positions by buying put options from the big investment banks. As a result, some of the investment banks have also been forced to buy put options in order to hedge their own open positions.

Come the triple witching hour, the institutions and securities houses will have to decide whether to roll-over those positions, or close them and take a profit. Most of them will no doubt choose to close, thereby creating those sharp movements in the market that have become associated with triple witching. Dealers say it could generate some short-term gains for the market.

The Americans will have to endure their own triple witching just before the close of business on Friday night.