London is in uproar this week as the London Stock Exchange, the world's third largest exchange, struggles to explain--or not--how it managed to be out of action for almost seven straight hours on what would have been the busiest trading day of the year. Confused traders--itching to get to work after the news of the government buy-out of US mortgage lenders Fannie Mae and Freddie Mac on Sunday--were left twiddling their thumbs waiting for some sign that they could begin trading. The green light came at last about a half hour before the end of the trading day.

Speculation abounds as to how this could have happened at a time when the LSE has been boasting about the capacity and speed offered by TradElect, its trading system launched in 2007. The LSE insists that it was not a problem with excessive volumes--and industry insiders say that the exchange’s efforts to reduce latency should not impact performance. Even a Nasdaq official jumped grudgingly to the LSE’s defense on this matter this morning at the annual Futures and Options conference in New York, saying that this was the only time he would defend the LSE, but having a fast platform doesn’t mean you sacrifice reliability. Then he couldn’t resist adding: But they weren’t that fast to begin with.

Whatever the cause, an outage such as this could not have come at a worse time for the LSE. Not only was it potentially one of the busiest trading days of the year, but the multi-lateral trading facilities (MTFs) spawned by Mifid are snapping at the venerable exchange’s heels. Volumes on Instinet-owned Chi-X are growing by the day and consortium-owned Turquoise, now fully launched, looks set to become another viable alternative to the traditional exchange model.

This time around, the LSE got lucky: broker-owned smart order routers were programmed to wait until the LSE came back online before starting to look for the best price once more, which meant that the MTFs, which were not suffering any technical problems themselves had to wait for the LSE to come back online before they could try and pick off any of the order flow. But if the LSE suffers another big technical failure like this I wonder how long it will be before those smart routers are reprogrammed. Technical faults do happen but this can't have helped instill confidence in a historic exchange that is competing in a brave new world of nimble alternative trading venues.