Latent Value

It's the fast, robust and scalable technology platform that's enticing suitors to pay over the odds for the LSE

If there were a million reasons why Clara Furse was right in fighting so hard to repel the succession of suitors for the London Stock Exchange (she was recently awarded an additional £1m bonus for the effort) there was one surprising reason why the LSE was such an attractive target in the first place.

One would naturally think that the scrum for control of the LSE was due to its viability as a business and the continued strength of London as a financial centre, able to attract the largest foreign companies to its market. Well, maybe. But technology is likely to have had just as much of a part to play as geography in making the LSE such an attractive acquisition target for Deutsche Börse, Euronext and, most entertainingly of all, Nasdaq.

The underlying electronic trading system at the LSE, Sets, is capable of processing 400,000 trades a day. This is attractive enough to potential suitors, but a largescale upgrade, which is nearing completion, really does put the LSE “in a peer group of just one,” according to its chief information officer, David Lester.

Speaking to Information World Review, a sister publication of Financial Director aimed at information professionals, Lester pointed to the exchange’s new TradElect system as differentiating the LSE from the crowd. It will allow transactions to be completed in just 10 milliseconds, compared to the 110 milliseconds currently experienced by the Sets system. “The New York Stock Exchange has a latency of 200 milliseconds,” boasts Lester.

While the current Sets system being used by the exchange is a remarkable piece of technology (it is the only trading platform in the world which has not experienced a single unplanned outage in six years) it doesn’t come without its weaknesses. For example, it must be shut down for four hours each evening to prepare it for the next day’s trading. And, as Lester says, you can’t run a global market on a system which has to be shut down every evening.

So, the last weekend in April will see the Stock Exchange’s 335 member companies taking part in the first live test of its brand new TradElect electronic trading system, when they will operate as if it was a normal working day to test the compatibility of their own systems with those of the LSE. Similar test days are also scheduled for mid-May and early-June.

Assuming it all goes well, and judging by a similar test day in South Africa in March, where the LSE’s technology is being licensed, this is quite likely; the new Accenture-developed system will be up and running by the early summer.

One thing that excites Lester about the new technology platform and, no doubt, one of the things which proved extremely enticing to Nasdaq, is the ease with which the trading platform can be migrated to other markets and jurisdictions. LSE’s partnership with the Tokyo Stock Exchange, which was announced soon after Nasdaq finally admitted defeat in its pursuit of the LSE, is a case in point. The aim of the relationship is to provide cross-border market access for member firms of both exchanges and, in time, the prospect of near round-the-clock trading. This simply wouldn’t be possible without a robust and scalable technology platform.

But while the ease of migration provided by TradElect is enticing enough, what really makes it stand out from the crowd is the vastly increased speed of the system. It is this which is of most benefit to traders and member companies of the LSE and, one can assume, potential suitors.

The improved latency is most useful in meeting the growing needs of algorithmic trading programmes (where computer programmes buy or sell stock based on the occurrence of a series of events) which has radically increased the volume of trades going through the exchange every day, and is becoming increasingly popular with both hedge funds and investment banks.

Algorithmic trading is a growing trend and has radically increased the volume of daily trades. The programmes automatically search for price anomalies that might exist for only a fraction of a second. It’s estimated that around 40% of equity trading volumes on the Deutsche Börse are now attributable to algorithmic programmes with a similar percentage assumed on the LSE. Nasdaq, however, attributes more than half of all its trading volumes to algorithmic trading.

What this story illustrates is that good IT strategy can make a real and material difference to the success of a business. In this case, a four-year technology project has left the LSE streets ahead of the competition – to such an extent that rivals were literally queuing up to pay over the odds for the company.

So, while Furse is to be congratulated for keeping the wolves at bay, perhaps she should be sharing her £1m bonus with CIO David Lester. Because if it wasn’t for him, Furse probably wouldn’t have had the fight on her hands in the first place.