Financial trading systems under scrutiny as City marks 25 years since the 'big bang'

Financial services regulators are being urged to assess the market impact of technology developments supporting high-frequency trading, as the London Stock Exchange celebrates 25 years of electronic share transactions.

Karl FlindersI am Computer Weekly's services editor. My main focus areas for stories are financial services and outsourcing.

Typically for financial services I write about how the retail and investment banks are harnessing technology and how systems can be used to help companies meet regulations such as Basel II and the Markets in Financial instruments Directive (MiFID).

Outsourcing is relevant across all business and technology sector and focuses on the strategic and cost cutting benefits associated with outsourcing IT.

Topical issues include the insourcing versus outsourcing debate and whether it is better to off-shore, near-shore or on-shore your outsourced technology.

View all articles by Karl Flinders > > 020 8652 2068 

Financial services regulators are being urged to assess the market impact of technology developments supporting high-frequency trading, as the London Stock Exchange celebrates 25 years of electronic share transactions.

On 27 October 1986 the London Stock Exchange closed its trading floor and moved to electronic trading in a development known as the big bang. From the early days when electronic trades could take up to 30 minutes, today shares are bought and sold in microseconds.

The need for speed has gripped the trading sector for years as investment companies that use computer programs to trade high volumes crave systems that can provide the shortest time from an order being made to completion.

These technology developments have meant, for example, that the London Stock Exchange completed trades worth £1.9tn last year. But the speed of systems also put pressure on trading venues and regulators to avoid trading spiralling out of control.

The International Organisation of Securities Commissions (IOSCO) has released a report that analysed the major technology developments in the trading sector. It called for regulators to monitor these technologies and assess how they affect finance markets.

Masamichi Kono, chairman of IOSCO's technical committee said: "Markets are evolving rapidly and it is important for regulators not only to monitor developments in technology and market structure, but also to continue to assess the impact of these changes on market integrity and efficiency and to address any risks identified."

Recent years have seen heightened competition in the stock exchange sector following legislation in November 2007, known as the Markets in Financial Instruments Directive (Mifid), which enabled new companies to enter the sector. These trading venues, known as multilateral trading facilities (MTFs) came to market with platforms that offered faster trading.

MTFs such Chi-X and Bats have increased the performance and speed of their systems, putting the London Stock Exchange under pressure. For example, Chi-X and Bats quickly became able to complete trades in 0.4 milliseconds and 200 microseconds respectively, compared with the 3.7 milliseconds per trade it took for the London Stock Exchange trading platform of the time, known as Tradelect. But the London exchange reacted to the challenge and acquired a company to give it a system that can today complete a trade faster than any exchange.

The trading sector has also driven innovation in the companies that connect into it as well as the technology firms that supply it. Market data providers such as Thomson Reuters have had to react to increasing demands for fast services from the investment sector. For example Thomson Reuters has built seven datacentres containing internal clouds across the globe to feed information into client systems 20 times quicker.

Investment firms can now link directly into a Thomson Reuters cloud which is connected to trading venues. This cuts the time taken for data to reach traders. The project, known as Elektron, saw Thomson Reuters develop the core software and middleware in-house. This includes offshore development in Bangkok and Beijing.

The London Stock Exchange also offers trading companies the opportunity to put their servers in its datacentre to further reduce the time taken for messages to be sent and received.

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