When the London Stock Exchange acquired Sri Lankan software developer MillenniumIT, it turned outsourcing inside-out by bringing the service provider's resources in-house and continuing to supply third parties.
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In effect, the London Stock Exchange acquired an IT department, with its own technology and separate revenue stream, for a total cost of about £25m.
The full benefits of the acquisition of MillenniumIT, which was designed to make the London Stock Exchange's core trading platform more competitive, became clearer as the company announced its financial results for the full year ended 31 March.
The stock exchange reported a profit of £280m. This compared to £340m in the previous 12 months and part of the fall was caused by the investment in MillenniumIT.
MillenniumIT is providing the technology to replace the ageing Tradelect core trading platform. Now that the cost has been absorbed, the company can look to harnessing its new skills base and technology to cut costs and improve efficiency.
London Stock Exchange CEO Xavier Rolet says, "We are in the process of determining where other MillenniumIT technology can be used across the group."
Rolet describes the London Stock Exchange as an infrastructure provider and, as such, technology touches every part of its business.
As well as core trading platforms and other capital markets software, MillenniumIT also develops surveillance and clearing systems and smart order routers.
To begin with MillenniumIT's core trading platform will be implemented in four exchanges, beginning with the main London Stock Exchange in mid September.
By the end of September multi-trading facility Turquoise, which the London Stock Exchange took control of in December, will move onto MillenniumIT from a highly customised platform based on Cinnober.
The first quarter of 2011 will see Milan-based exchange Borsa Italiana, as well as the Johannesburg and Oslo exchanges, move onto MillenniumIT.
The London Stock Exchange acquired Borsa Italiana in 2007 for £1.63bn. It has had an agreement with the Johannesburg Stock Exchange to co-operate on technology and development since 2001. In 2008 the Oslo Stock Exchange plugged into the London Stock Exchange's core trading platform.
The MillenniumIT platform will provide immediate savings compared to Tradelect. It is built on open source software and so there are no licence fees.
The exchange also brought software development in-house with the acquisition. The savings are easy to measure. It paid Accenture £20m per year to work on Tradelect but spent a total of £25m on MillenniumIT, which has 200 software developers based in Sri Lanka.
But it is not just about savings. The competitive advantages of trading platforms come from their speed, their ability to cope with extreme peaks in demand and their flexibility to introduce new products and cope with new regulations.
Through MillenniumIT the London Stock Exchange will adopt a software development process it calls "BID" (Business Innovation-Dynamically), which could help it keep its competitive edge.
BID splits the development into three parts. The technology development in the form of hardware and operating systems, the application layer such as trading platforms, ERP and clearing systems and business controls sit on top.
This means it is faster and costs less to roll out a new software set-up. Stock exchanges regularly have to tweak systems to meet regulatory and business changes.
"It lowers the cost of development which means we can do more upgrade and introduce new products and services easier," says a London Stock Exchange spokesman. "With Tradelect we only did a couple of upgrades a year but with the new system we can do more."
MillenniumIT head Tony Weeresinghe is confident that the combination of additional research and development funds from the London Stock Exchange Group and MillenniumIT's development techniques will keep it competitive. "You can rest assured we will have the fastest end-to-end trade processing speed," he says. With trading speeds entering the realms of milliseconds, this will be a moving target.
The wider uses of MillenniumIT technology have yet to manifest, but one clear advantage comes through the fact that the London Stock Exchange and Turquoise trading systems will have the same application programming interface (API) and connectivity.
This, according to Turquoise CEO David Lester, means London Stock Exchange trading clients will be able to use Turquoise with no additional IT costs.
This will potentially bring 180 new customers to Turquoise, which currently has 50. Turquoise allows dark pool trading - where investment firms trade with each other without other companies being able to see it - as well as more conventional trading.
Lester says customers are not yet moving to Turquoise because the London Stock Exchange is in the process of retiring the Cinnober system that Turquoise runs on. The London Stock Exchange has set its sights on being Europe's biggest dark pool trading venue.
When trades are complete they have to be cleared and settled. Traditionally the London Stock Exchange did not offer clearing, but it added this to its services after the Financial Services Authority (FSA) set a precedent by approving IntercontinentalExchange to run its own clearing system in London.
The London Stock Exchange uses the X-TRM clearing technology it acquired from Borsa Italiana. The technology currently routes trades from the Tradelect core trading platform to clearing services, but MillenniumIT's technology could give it more options.
New revenue stream
Perhaps the most uncertain but potentially significant benefit of MillenniumIT is the potential for boosting revenues from sales of its software to other trading organisations. It contributed £6.7m in revenue to the London Stock Exchange since it was acquired in September last year.
It recently sold a trading surveillance system to the Egyptian Exchange. It also supplies systems to organisations such as Nairobi Stock Exchange, the London Metals Exchange, Colombo Stock Exchange and Dar es Salaam Stock Exchange. But sales will be limited while MillenniumIT's focus is on migrating the London Stock Exchange and the trading platforms it partners to its core trading platform.
The London Stock Exchange's acquisition of MillenniumIT was a bold move. It came as a result of what many considered a failure, with Tradelect's inability to adapt to a changing market. If MillenniumIT delivers what it promises, the London Stock Exchange could yet reach its ambition of being a top-five global exchange.