LONDON (Reuters) - The London Stock Exchange LSE.L suffered its worst systems failure in eight years on Monday, forcing the world's third largest share market to suspend trading for about seven hours and infuriating its users.

A man passes the London Stock Exchange in central London May 21, 2008. REUTERS/Luke MacGregor

The problem occurred on what could have been one of London's busiest trading days of the year, as markets rebounded worldwide following the U.S. government's decision to bail out mortgage companies Fannie Mae FNM.N and Freddie Mac FRE.N.

“We have the biggest takeover in the history of the known world ... and then we can’t trade. It’s terrible,” one trader said.

The Johannesburg Stock Exchange, which uses the LSE’s trading platform TradElect, also suspended trading.

“This halt today clearly has once again damaged (the LSE’s) reputation as a leading exchange, especially on a day like today, highlighting that it may have been unable to handle the volumes this morning,” added another trader.

The exchange would not say whether volume was the issue and declined to give details on what had caused the problem. But angry customers were demanding an explanation.

“We want answers as to how this happened in the first place and reassurances that it will not happened again,” said Angus Rigby, chief executive of brokerage TD Waterhouse.

The LSE, the world number-three exchange by traded volume in the first half of this year, opened for trading as usual at 0700 GMT, but connectivity problems left some brokers unable to trade. It was then forced to suspend trading to ensure some market players were not disadvantaged.

The Exchange finally got trading going at 1500 GMT -- half an hour before it was due to close.

“We had to sit on our hands and wait for fragmented and at times ambiguous announcements as to when the LSE would be up and running ... It’s ironic that since 2:30 today we’ve been able to trade, and get a fair market value on Barclays or any other ADR (American depository receipt) on the New York Exchange, but not on the LSE,” said Rigby.

The UK Financial Services Authority, in its Financial Risk Outlook 2008 report, says the risk of such infrastructure failures is growing with the rise of electronic trading and straight-through processing.

SYSTEMS UPGRADES

The LSE plans a series of system upgrades and is migrating Italian equities to its trading platform TradElect this month.

Monday’s trading suspension was the longest suffered by the exchange since April 5, 2000, when problems with an older trading system led to an eight-hour suspension.

On June 17, the Milan Stock Exchange, which the LSE acquired in October 2007, suspended trading due to technical difficulties. On November 7 last year the LSE itself experienced a connectivity problem with its real-time market data system Infolect which connects to TradElect.

The outrage came at an embarrassing time as the LSE fights new entrants. In a letter to the Financial Times on Monday LSE Chief Executive Clara Furse defended the exchange’s position, describing TradElect, which the bourse introduced last year, as “the cutting edge”.

Nasdaq OMX Europe, a cash equity platform set up by transatlantic exchange group Nasdaq OMX NDAQ.O to rival European bourses such as LSE and Deutsche Boerse DB1Gn.DE, will start on September 26. NYSE Euronext NYX.NNYX.PA said it will launch a pan-European market in November.

The LSE faces growing competition from new entrants and its share price has fallen sharply as a result this year.

Turquoise, a cash equities trading venue backed by nine investment banks, as well as Chi-X Europe, owned by Nomura 8604.T and investment banks, are both gaining market share. Both said on Monday they were trading normally.

The LSE outage coincided with a system failure at the Intercontinental Exchange ICE.N (ICE), which shut trade across London commodity markets for more than an hour. According to an ICE official there was no apparent link between the two.