Traders search for gilt edge

The gilt market's plans to develop a common electronic exchange have already raised concerns over cost and IT integration. Nick...

The gilt market's plans to develop a common electronic exchange have already raised concerns over cost and IT integration. Nick Huber reports

Plans to develop an electronic trading system for the multi-billion pound government bond market within the next year have been broadly welcomed.

Many of the European and US gilt markets already have common electronic trading systems. The 124-year-old London Metal Exchange is due to launch its electronic trading system later this month (February), and the London Stock Exchange already has a well-established electronic trading platform, Sets.

But the devil is in the detail of IT specification and concerns are already emerging among the gilt market's members over how much the new system will cost and how much the market members will have to invest in it.

The current gilt market includes 17 market makers - including Barclays Capital and Merrill Lynch International - plus brokers and traders.

The contract to develop the trading system could be worth at least £3m in consultancy and development fees for the successful supplier, according to market insiders.

The Gilt Edged Market Makers Association will decide which trading system to opt for and which supplier they want to use, according to the Debt Management Office, an executive agency of the Treasury. The new system should be in place by early next year.

The agency has issued an open invitation to potential trading platform suppliers, following a consultation paper last autumn.

But market insiders have estimated that IT conversion costs involved in linking to the planned trading system could be up to £300,000 for each market maker.

Conversion costs can help to make or break new would-be trading platforms for the market. Just ask the London Stock Exchange. During its abortive merger bid with the Frankfurt stock exchange last year, the London exchange struggled to ease concerns that the Anglo-German union would entail conversion costs of up to £500,000 for its member companies.

Choosing an existing electronic trading provider would reduce conversion costs to the new platform, as a sizeable proportion of the gilt market's members would already be connected to the system. But there are plenty of suppliers from which to choose, such as EDS and Accenture (formerly Andersen Consulting), with experience in similar projects.

Other markets making the move to electronic trading could provide a clue as to the possible costs for the gilt market's trading system.

The London Metal Exchange is set to launch its electronic trading system later this month in a two-phase roll-out. The exchange has estimated that its investment in the new screen trading system will be about £10m over a three-year period.

OM Group, the Swedish technology supplier which launched a failed hostile takeover bid for the London Stock Exchange last year, is supplying the metal exchange's trading system.

The business arguments for introducing a market-wide platform for the gilt market, as with other exchanges, are not in doubt. The screen-based system should allow the market to handle a greater turnover, generating more liquidity, and helping the Government reduce its debt.

But some member firms in the gilt market are also sceptical as to whether a common system can be delivered within a year.

Dominic Connor, e-commerce chief at Dowgate - an Inter Dealer Broker that supplies an electronic trading system for the gilt market - said he supported a common platform for the gilt market.

"The 22 outfits will have to work hard to integrate the new trading system with their systems," said Connor. An £8bn per day system needs thorough testing and we are looking at a realistic target of the second quarter of 2002 for live trading."

Other seasoned observers of large-scale exchange IT projects have warned that the rival members of the gilt market may struggle to agree on IT specifications to suit everyone, which could slow down the system's development.

"The biggest problem is scope-creep. If you are trying to get the platform's specifications written by 17 committee members you could get the camel that looks like it has been designed by a committee," said one exchange systems specialist at a large supplier.

But the IT challenges, and likely headaches, have barely begun. The market's competing banks, traders and brokers have to put aside self interest and agree on a supplier and trading system to suit the whole market.

The thorny issue of who pays for the system - and how much it will cost - also needs to be tackled, along with the IT conversion costs for linking to the new system. Major IT projects are hard enough to co-ordinate within one company let alone a market of twenty.

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