Imagine if your doctor told you could not go much longer without a new heart, but also told you it would take 15 months to replace the one you have and you could not have a single day off while it is being done.
That's what happened at the London Stock Exchange late in 2009, when it realised that its in-house core trading platform developed in .Net, known as Tradelect, was no longer up to the job.
The increasing number of investment banks using algorithmic trading software, as well as increased competition to traditional exchanges, meant that the exchange had to upgrade its technology platform, but it was not possible to do this efficiently with Tradelect.
The stock exchange says Tradelect saved the company from being taken over because it enabled it to keep pace with electronic trading, but it could not keep pace with technology developments and without a faster, flexible and more reliable replacement the acquisitive vultures would be circling the London Stock Exchange once more.
Reducing cost and inmproving performance was necessary for the exchange at a time of increased competition, says PJ Di Giammarino, CEO at financial services think-tank JWG-IT. "It was vital for the London Stock Exchange to get the cost structure down because the marketplace for exchanges is becoming extremely competitive."
The London Stock Exchange has stated that it aims to be a top-five global trading venue. To achieve this it must have technology at least as good as its competitors because, other than price, performance is the about most important attribute of a trading venue.
Rik Turner, analyst at Ovum, says having one of the fastest trading systems is vital to an exchange with these ambitions because mergers and acquisitions are vital. "It is a calling-card when you want to do deals," he says. The promise of a state-of-the-art trading system is attractive to potential partners and acquisitions.
Turner says Millennium IT was always a niche developer and not just a low-cost development company. "It has the best of both worlds as a specialist trading software developer in a low-cost country."
After admitting it had a problem the stock exchange had to quickly find a replacement system. It did not have time to build a replacement itself because the market was moving too fast. Competitors would be enhancing far superior systems while the stock exchange built from scratch. Tradelect, for instance, took four years to complete and this time around that was not good enough.
To buy and what to buy
So the exchange had to buy a system and it had a choice: would it buy another stock exchange to gain a competitive technology, or it could buy the software from a supplier?
It decided to buy the technology from a supplier. But to ensure it retained control of the software's development it bought the company that developed it. In September 2009 the London Stock Exchange acquired Sri-Lanka based software company MillenniumIT for £18m.
The MillenniumIT trading technology, which is built on Linux, was chosen and now the IT team at the London Stock Exchange had to replace Tradelect while the stock exchange continued to operate. When millions of pounds are traded in milliseconds even a few minutes offline can be costly to traders and to the reputation of exchanges. In an increasingly competitive world the speed and reliability of trading systems has never been more important.
In preparation for the migration the stock exchange brought in a new CIO with the required experience. Antoine Shagoury joined in February 2010.
Shagoury worked for the American Stock Exchange (Amex) in 2003 as a consultant and became CIO in 2004, before leaving when the New York Stock Exchange acquired Amex. While at Amex he implemented MillenniumIT's trading software. He says the migration of the London Stock Exchange to Millennium IT is the largest he has been involved in because of the number of members and partners of the exchange. He says the move to Millennium IT is critical in helping the stock exchange reach its ambition of being a top global exchange. "This is an inflection point and it will help us get to where we want to be."
The technology will make the exchange's trading faster and more reliable, as well as making it quicker to introduce new functionality, he says.
Millennium IT will help the stock exchange keep pace with changes through a software development technique that enables rapid changes. This is known as BID (business innovation-dynamically), which allows the exchange to make upgrades quicker and at lower cost which is vital in the trading sector.
During the migration from Tradelect to MillenniumIT the London Stock Exchange took control of competitor Turquoise. This is one of a new breed of trading venues, known as a multilateral trading facilities (MTFs) that sprang up after the introduction of the FSA's Markets in Financial Instruments Directive (Mifid) (see box 2). Turquoise offers traders the opportunity to trade off-the-exchange, where their activity cannot be seen by other traders, in a trading environment known as a "dark pool". Turquoise became the pioneering guinea pig of MillenniumIT when the London Stock Exchange management decided to migrate Turquoise to MillenniumIT first in October 2010.
Shagoury says this was advantageous in that it prepared investment firms that use the main London Stock Exchange for the change. "This exposed many of our clients to the new technology because Turquoise has largely the same clients. It gave them time to get used to it."
Turquoise quickly claimed to be the fastest trading platform in the world when it completed trades end-to-end in an average of 126 microseconds.
It also had a major outage but this was later revealed to have nothing to do with MillenniumIT but was actually a networking problem caused by human error. But as a result of the human error the migration of the London Stock Exchange from Tradelect to MillenniumIT was put back from its planned November 2010 migration to February 2011.
It went live to its revised schedule at 8.00am on 14 February 2011, but on Friday, 25 February the exchange had to stop trading as a result of a technical problem.
The London Stock Exchange cannot afford these relapses during a period of consolidation in the trading sector. The race to be the biggest and best is on. The London Stock Exchange is itself in merger talks with the Toronto exchange, to create an exchange worth £3.7tn, while Deutsche Borse and NYSE are also talking about coming together. The chance to integrate two exchanges onto a single platform has huge cost advantages and, if the right technology is chosen, performance improvements.
Tradelect went live in June 2007 on time and to budget in the culmination of a four-year, £40m IT roadmap.
"One of the core principles at the start of the project was software agility." Tradelect was developed using Microsoft's .net framework and at its heart was a complex piece of [proprietary] middleware called Ibus. It replaced the Sets electronic order book trading service, which was developed using Cobol in 1995. The cost of increasing the capacity of Tradelect would be 20% of the cost of creating a similar increase on Sets, said Paine.
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.
Original timeline for introduction of MillenniumIT trading system:
July 2010: Launch of self certification service
September 2010: Early access service available
October 2010: Dress rehearsal 1
October 2010: Dress rehearsal 2
October 2010: Dress rehearsal 3
November 2010: Go-live
November 2010: Contingency go-live date
24 January 2011 Early access service available
29 January 2011 Dress rehearsal
5 February 2011 Dress rehearsal
12 February 2011 Connectivity testing
14 February 2011 Migration
Through MillenniumIT the London Stock Exchange will adopt a software development process it calls "BID" (business innovation-dynamically), which could help it retain 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.