The chief information officer of the London Stock Exchange discusses its new core trading system, TradElect, with Alan Duerden.

Amid the arrival of the Markets in Financial Instruments Directive (MiFID), the increasing importance of lowering latency (the delay between order and execution) and stock exchange consolidation taking off, the board of the London Stock Exchange (LSE) looked to its chief information officer David Lester for guidance on how it could position itself as the world’s leading exchange.

His answer was to initiate a four-year technology project that would replace SETS, the electronic trading engine that underpinned the exchange, to culminate in June this year with the launch of TradElect. This core trading system aims to enhance performance, allow greater trading volumes and reduce latency.

“It was our equivalent of putting a rocket on the moon,” reflects Mr Lester, who believes innovation will be the key differentiator between major and minor exchange players in the future.

Overhaul not upgrade

While other exchanges around the world are ramping up their technology offerings, the LSE is the first to overhaul its trading system. In Europe, most exchanges are choosing to upgrade their platforms, relying on the existing technology that underpins their trading systems even though they were built more than a decade ago. “This was not an option for us,” says Mr Lester. “We couldn’t achieve all the benefits we wanted by just tactically upgrading SETS.”

The US exchanges are following more of an acquisition model, with the likes of the New York Stock Exchange and Nasdaq buying technology from third-party companies such as Instinet. Mr Lester sees a risk in trying to turn what he believes are competitive, lean and mean systems into fully-fledged, exchange-capable platforms, so he opted for a full-scale revamp for the LSE.

Exchanges around the world have exhibited sharp rises in trading volumes and this curve shows no sign of turning down. Since SETS went live in 1997, average daily trading volumes have risen from 10,000 to 500,000 and peaked in February this year at almost 730,000. “Having a system that we can now scale and has greater capacity positions us to progress on a European footprint in a much better way than SETS ever could.”

Confidence is riding high at the LSE, with TradElect seen as being competitive not only for its volume capabilities but also in its fast response times. Latencies have dropped from about 600 milliseconds for executions on SETS when it first went live to 10 milliseconds on the new TradElect platform, which Mr Lester believes makes it almost impossible for potential entrants to the market, such as Project Turquoise or Equiduct, to be competitive.

Ahead of the London launch, the LSE used its IT relationship with the Johannesburg Stock Exchange, and TradElect was formally rolled out in the South African market this April. So far Mr Lester believes the testing of TradElect has gone without any hiccups but he says that the platform is still in its tuning phase. “We are just monitoring, measuring and making sure all of our customers can cope with the new system, and are tuning it to get latency down further. We believe we will get another two or three milliseconds off by October,” he says.

Consolidation hopes

As well as TradElect, the LSE’s trading platform has been further enhanced with a shift from Tandem, its expensive mainframe technology, onto commodity hardware. Mr Lester hopes this move will fan the flames of consolidation – a word that is never far away from the exchange.

“On commodity hardware we have got more power, which allows us to scale the market horizontally,” he says. “This platform increases our ability to take the lead in global consolidation because we have got the platform on which to enrol the benefits of our technology to other exchanges.”

It has been a useful step for the LSE, which is already using its new technology to leverage relationships with other exchanges. In June it announced a proposed merger with Borse Italiana to create a European exchange group with a greater diversification across asset classes. The proposal was later blocked by Nasdaq, which has a 30% stake in the LSE, and is due to be revisited in the first half of this month. Talks are also still ongoing with the Tokyo Stock Exchange about how it can take advantage of the LSE’s technology platforms in the future.

Innovation is at the heart of what the LSE has been building towards for the past four years. It is now reaping the rewards of putting effort and money into the technology that will bring forward new kinds of participants and alpha beta strategies to the market that do not exist today.

“There needs to be more innovation at exchanges,” says Mr Lester. He firmly believes that the LSE is the fastest growing exchange in the world because it has invested in technology.

CEREER HISTORY

Responsible for the Information and Technology Services division at the London Stock Exchange. Since joining in June 2001, has overseen projects such as upgrades to the SETS trading platform; introduction of the internet protocol communications network; provision of technology services to the JSE Securities Exchange South Africa; and implementation of a corporate data warehouse. Oversaw the completion of the Technology Roadmap, culminating in the introduction of the LSE’s new trading system, TradElect, in June 2007.Developed, and is implementing, the information services diversification strategy.Before joining the Exchange, he worked at the Primark Corporation.

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