As the London Stock Exchange awaits the outcome of its bid to take
over the Liffe futures exchange, Nick Huber looks at the
implications of the shake-up in the financial markets for IT
professionals
The increased dependence of financial traders on IT systems opens
up intriguing prospects for IT professionals, particularly in light
of the London Stock Exchange's bid for the London International
Financial Futures Exchange (Liffe).
If a new trading system was developed to allow investors to trade
both shares and futures, the London Stock Exchange would probably
scrap its own electronic trading platform, Sets. The most
ambitious, and risky, option would be to build a new multi-trading
platform. Alternatively, the merged exchange could reconfigure
Liffe's Connect trading system.
Neither of these options is straightforward. History has shown that
building a scalable secure trading platform is no easy task, even
for a well-funded organisation. The London Stock Exchange's
ill-fated Taurus share settlement system failed during the 1990s
despite millions of pounds being spent on development.
Analysts have also warned that any attempt to create a joint
trading system will impose formidable project management demands,
requiring unprecedented co-operation between the exchanges' IT
departments.
So there is plenty for Liffe's board to mull over as it considers
rival bids from other European exchanges.
Understandably both the London Stock Exchange and Liffe have
remained tight-lipped about the IT implications of any deal but,
privately, Liffe is clear that any new exchange should centre
around its Connect trading system.
Given the complexity and cost of building and installing a new
trading system from scratch, industry experts believe the stock
exchange will go with Connect if the deal goes through.
"It is a big project and it makes a good deal of sense to extend
the Connect product because it already has equity functionality,"
said Mike Jones, director of Internet trading service MBA and
former chairman of the Association of Private Client Investment
Managers and Stockbrokers. "More investment has gone into Connect
[compared to Sets] and Liffe has been able to sell it to other
exchanges with a degree of success."
The performance of Connect was reviewed and improved before it was
offered as an "industrial-strength" product to other exchanges, he
said.
Developing Connect to include functionality as an equity trading
platform should be straightforward compared to building an entirely
new platform because the underlying functions of the two trading
systems are broadly similar.
However, extending Connect could take up to a year, according to
industry observers. The main challenge will be the project
management - agreeing the levels of functionality required and
bringing the new platform in on time and to budget.
"You need to ensure that you have a very good project management
team if you want to avoid scope-creep," said Tony Lock, senior
analyst at Bloor Research. "If people start deciding you can do
this and that [without central co-ordination] it can delay things
enormously and make the project undeliverable."
If the project is to succeed IT staff at both exchanges will have
to work together closely. But Liffe and the London Stock Exchange
have very different approaches to IT.
The London Stock Exchange has outsourced virtually all of its IT
department to management consultancy Accenture. "The big problem
with the stock exchange is that it has little IT expertise
in-house," said one industry expert, who asked not to be named. "It
only has about 40 IT guys to act as a buffer between the business
and Accenture."
He added that Accenture is well-placed to land any new IT contracts
that stem from a successful takeover - particularly building a new
platform. However, others believe the stock exchange will have to
use specialist suppliers for the technical aspects of any IT
project.
"If you want to create a solution that is complex and robust then
you would probably want to take on IBM Global services," said Lock.
"IBM has the infrastructure and services arm and a lot of
consultancies sub-contract work to IBM for designing the [system]
and the architecture. The backbone of the system will run on
this."
The London Stock Exchange's bid for Liffe may yet fall through or
be trumped by a rival exchange. However, the exchange markets
appear to be on the verge of their biggest shake-up for decades and
this will have major implications for IT staff and systems.
Building a new, multi-trading platform for the equity and futures
markets would be an immense challenge littered with risks.
Reshaping Liffe's Connect trading system may be the easier option
but it will be far from a walk in the park. It would require
careful co-operation and first-class project management between two
organisations that have very different IT cultures. If the
exchanges forget these basic disciplines the union could soon turn
sour.
London Stock Exchange IT
Trading system
Sets (Stock Exchange Electronic Trading Service), the London Stock
Exchange's trading platform, went live in 1997. Developed by
Accenture - formerly Andersen Consulting - it is based on Tandem
servers.
Sets' effectiveness was called into question last year by Swedish
technology company OM Group during its failed takeover bid for the
exchange. OM Group claimed that Sets was not scalable enough to
handle the increasing demand for trading shares. But the London
Stock Exchange remains keen to sell Sets to other markets. Earlier
this year it signed an £11m deal to supply the trading platform to
the Johannesburg Stock Exchange.
The London Stock Exchange also came under fire for the way it
handled its failed merger with the Frankfurt Stock Exchange last
year. Members criticised it for failing to keep them informed about
the level of IT conversion costs involved in the proposed deal,
which would have seen Sets scrapped and the London exchange members
move to the German electronic trading system Xetra, which is used
by the Deutsche Borse market.
IT Department and Projects
The London Stock Exchange
has outsourced most of its IT department to Accenture, which is
responsible for the day-to-day running of IT systems, including its
network and desktops.
The stack exchange argues that this year's upgrade from Tandem K to
Tandem S servers should treble Sets' trading capacity. It is also
replacing its ageing X.25 network with an IP-based system as part
of a drive to provide increased capacity for customer
services.
Liffe IT
Trading System
The London International Financial Futures Exchange's (Liffe)
trading system, called Connect, is a technology success story.
Launched in 1998, it was the electronic replacement for traditional
open-floor trading between dealers. Connect was developed in-house
in conjunction with various software suppliers and customers.
The system handles all futures and options contracts, displaying
all transacted prices in real time. Liffe members can access
Connect by either developing front-end software themselves to
interface with the system, or using software from any of 15
independent software suppliers.
Liffe has had some early success in selling Connect on to other
exchanges. Its biggest customer so far has been Nasdaq, the US
high-tech exchange.
IT Department and Projects
Liffe is in the process of
spinning off its IT department as a consultancy. The new division
is moving towards becoming a separate technology company within the
Liffe holding company but will continue to service the technology
needs of Liffe.
The move is a bid to boost revenues by offering consultancy
services to other companies and exchanges as well as offering
managed services. It will also market Connect to other exchanges.