The London Stock Exchange's decision to replace its core trading platform is more complicated than ever because of the fierce competition in the sector.
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Will the company have to replace Tradelect with a system used by a competitor? Will it look outside Europe for a system? Or will itmerge with another company to gain the appropriate technology? Or there isthe option of upgrading Tradelect.
The stock exchange announced in June that it will replace Tradelect because it is no longercompetitive in its current form. Tradelect, which was introduced two years ago,was developed using Microsoft's .net framework. It replaced the Sets electronic order book trading service, which was developed using Cobol in 1995. The project to design, build and implement Tradelect took four yearsand cost £40m.
Since its introduction, the trading sector has seen major liberalisation. The pan-European Markets in Financial Services Directive (MiFID) has led to creation of many more trading venues and competition for the London Stock Exchange.
Chris Skinner, CEO at financial services think-tank The Financial Services Club, says replacing Tradelect is a difficult task, but one that the London Stock Exchange has to complete.
He says it will not upgrade the existing software, claiming it is a "complete mess" and must be replaced.
The London Stock Exchangesaysthe initial list of18 optionshas been whittled down,but a decision is still weeks away. "Several options are on the table and we are making progress," said a spokesman.
If it wants to be competitive, the logical choice would bethe Chi-Tech platform, which is part of the same company as trading venue Chi X, says one source."If it hasany sense it willchoose Chi-Tech because it is the fastest and most robust."
Chi-X, can complete a trade in 0.4 milliseconds, compared withthe London Stock Exchange's 2.7 milliseconds.
But Yann L'Huillier, CTO at trading venue Turquoise, says no exchange will want to use the same system as another European trading venue."It would be a problem because your competitor would know the development you are doing."
Skinner at the Financial Services Club does not see why the exchange cannot use a competitive system because most systems can be customised. "At least it wouldhave parity. Itcould then add to it," he says.
Jan Apri, CEO at trading platform supplier Cinnober, agreesthat competitors can use the same core platforms. "The decision not to use the same system as a competitor is a political one,not a technology one."
Europe's trading venues use about 20 trading platforms, but Brian Taylor, managing director ofBTA Consulting, says if using a competitor's system is a problem, the London Stock Exchange will have to look further afield."If it does notwant to use a platform the same as a competitor, it could buy outside Europe." He suggeststhe Millennium System in Sri Lanka is one such possibility.
Taylorsays the stock exchange could also acquire or merge with another company to gain technology.
L'Huillier agrees. "It is possible that the stock exchange could buy a platform from a company it will do business with or merge with."
Turquoise has announced its plan to find a buyer and has sent notices out to potential bidders, including the London Stock Exchange.
The London Stock Exchange is operating in a far more competitive environment today than it was when Tradelect was introduced two years ago. It would not have expected to have to make this decision so quickly, but the need to do sodemonstratesthe scale of change.