The London Stock Exchange is facing the biggest
challenge of its 200-year history as it attempts to attract growing
numbers of computerised traders to reversedeclining market share.
After recognising in June that its Tradelect core trading
system, which
took four years to develop and cost £40m, was not good enough
to cater for the growing numbers of algorithmic traders, the
exchange took the brave step of replacing it.
Technology from MillenniumIT, which the exchange acquired for
£18m in September, will replace Tradelect before the end of
2010.
Algorithmic
trading systems buy and sell shares automatically when prices
match predetermined levels. Traders may hold shares for only
milliseconds, and make small amounts of money on massive volumes of
trades.
As a result, the trading venues they use must be able to provide
high speeds, high volumes and consistency. Downtime and slow
trading can slash traders' revenue.
New competitors to the London Stock Exchange, known as
multi-trading facilities (MTFs), have emerged as a result of the
Markets in Financial Instruments Directive (Mifid), which was
introduced in November 2007 to liberalise the sector.
MTFs such Chi-X and Bats have increased the performance and
speed of their trading systems, putting the London Stock Exchange
under pressure.
For example, Chi-X and Bats can complete trades in 0.4
milliseconds and 200 microseconds respectively, compared with
Tradelect's 3.7 milliseconds per trade.
MillenniumIT says its trading platform can complete a trade in
130 microseconds and expects this to fall to 40 microseconds over
time.
London Stock Exchange CIO David Lester says the London Stock
Exchange did not have the speed, throughput and consistency that
algorithmic traders demand.
But he says the MillenniumIT technology will give it this
capability. It has its own specialist platform for algorithmic
trading known as Millennium Exchange.
"It will allow us to put in place systems with much lower
latency and consistently higher volumes. Algorithmic traders
currently go to the MTFs because today they offer more attractive
throughput and latency," says Lester.
MTFs realised the importance of technology that can process
large volumes of trades at high speeds because of the rapid growth
in algorithmic trading.
PJ Di Giammarino, CEO at think-tank JWG-IT, which specialises in
the investment sector, says trading venues cannot survive if their
trading systems are not competitive.
"Performance is the name of the game. With the complexity of the
European marketplace and the large number of venues, every venue
has to be able to compete with the speed and quality of
execution."
MillenniumIT will also help reduce technology costs for the
London Stock Exchange and will be a profit centre.
Development costs will come down immediately. The London Stock
Exchange says the £18m it spent on MillenniumIT is less than it
used to pay Accenture every year for services that it can now do
itself.
The London Stock Exchange built a core trading system in-house
with the ability to be upgraded to meet changes in demand. It then
had to replace it because it couldn't. But it has been brave and
stuck its neck by buying a supplier to fix its technology problems,
cut costs and increase its IT services revenues.
About MillenniumIT
MillenniumIT will be run separately because the stock exchange
wants it to remain independent as a service provider.
A spokesperson said this was to ensure the company's
developments are not stifled. It will also make money through
selling trading systems.
"Our dream is that our costs go down while MillenniumIT's
profits go up," said London Stock Exchange CIO David Lester.
Although Lester will not be in charge of MillienniumIT, he will
retain control of development as the internal customer.
MillenniumIT, which brings its own surveillance, smart order
routing and information dissemination systems to the London Stock
Exchange, has 300 software developers in Sri Lanka.