IT challenges increase with consolidation of exchanges

As the London Stock Exchange awaits the outcome of its bid to take over the Liffe futures exchange, Nick Huber looks at the...

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.
This was last published in November 2001

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