Chief technology officer Robin Paine is insourcing the London Metal Exchange’s IT function to fit its future as part of Hong Kong Exchanges and Clearing. He tells The Banker how the complex transformation is taking place.

“The IT function is a significant contributor to the success of the London Metal Exchange [LME] and is the largest single department within the company – both by headcount and by cost,” says Robin Paine, chief technology officer at the LME. “The IT function thus has a significant responsibility to deliver value to the LME market participants, the regulators and to the LME parent company, Hong Kong Exchanges and Clearing [HKEx].”

HKEx became the first Asian exchange to make a cross-border acquisition when it bought the LME in December 2012 for £1.4bn ($2.25bn). A significant restructuring is now taking place within the LME, which is the world’s largest metals market, trading both physical and derivative products. Mr Paine, who was appointed in June 2013, is overseeing an exciting but complex transformation.

The exchange will launch its own clearing business, LME Clear, in September 2014. The IT function is handling the technology development of LME Clear, in partnership with system provider Cinnober, and will also make the exchange ready for the cutover from the existing clearing provision from LCH.Clearnet.

“The technical, operational and organisational design [for LME Clear] is largely complete, with the software to support real-time clearing halfway through the second phase of a two-phase programme,” says Mr Paine. “The first phase of development and unit testing was completed four months ago. Additionally, the majority of the infrastructure is already commissioned within our two data centres. We thus remain on track to go live in September 2014.”

Route to market

The LME’s trading ‘venues’ include The Ring, its trading pit; telephony-based trading; and electronic trading via LME Select. Technology is central to all of these, but today it is electronic trading that is experiencing the greatest interest from members.

“We see those three venues as complementary, supporting and enhancing each other at appropriate points in the day,” says Mr Paine. “We are aware there may be further algorithmic proliferation in our market, just as we have seen in the equity market. We believe there is further demand for algorithmic participation in the commodity futures market we operate, so we must be ready for that.” 

There is also demand from the membership, perhaps ahead of algorithmic developments at the user end, for greater management information about the exchange’s trading patterns and its system response times. Mr Paine notes that LME members would also like greater choice in how they connect. 

“There are a number of options to connect in to the LME system,” he says. “However, through LME membership and market participant consultation, we believe there may be benefits to broadening that range of choice, so we are actively considering that. Today the choice is for market participants to access LME markets from our ‘community data centres’ or to connect in to us via a Multiprotocol Label Switching-based network. MPLS offers a number of advantages, such as speed of provisioning. However, it does have some disadvantages, so we are considering alternative mechanisms such as point-to-point high-speed fibre and also co-location services in addition to the proximity services offered from the community data centres.”

Keeping on top of the demands from members and the business requires the IT function to keep a close eye on technological developments. Grid computing and cloud technology are both seen as relatively mature and uptake may increase, but predictive technology is the next big thing.

“There are two types here: systems that offer preventative diagnosis to ensure our systems are able to operate, and systems that support early identification of information security threats, giving us an earlier warning regarding potential security breaches,” says Paine. “Both of those are based on algorithmic prediction and they tend to be made up of a grid of solutions in the case of information security. Trying to build a complex system to monitor threats proactively is not easy, but it is grabbing our attention. I would like to think we can get some benefit out of this thinking by perhaps late 2014 or early 2015.”

Structural reform

The IT function forms a substantial part of the LME, accounting for half of the exchange by headcount, totalling about 120 employees including contractors. The team includes specialists from a mix of disciplines including systems architecture, IT operations and programme and project management, business analysis, IT security, 24/7 operations and client relationship management. The management structure is fairly flat, which Mr Paine says is appropriate to the scale at which the department operates as well enabling it to react quickly to changes in demand.

A large part of the IT function that had been outsourced to Xchanging is being brought in house following the termination of that contract. Mr Paine’s short-term focus is on effectively managing that transition and on the ongoing provision of IT operations to run the market, with the Select electronic platform opening at 1am and closing at 7pm each day.

“We are collaborating closely with Xchanging to insource that function on May 1, 2014,” says Mr Paine. “There is a very significant focus from both the LME and Xchanging to ensure this transition is seamless and that the benefits of insourcing are realised. The insourcing project involves the transition of 100 employees and 150 contracts. Ensuring service continuity and the delivery of project commitments is critical to the success of the initiative. Communication to all transitioning staff and the implications of working directly for the LME are key to ensuring that IT staff feel comfortable with the transition and the benefits it will bring LME market participants and employees.”

Outsourcing's role

External technology provision will still be part of the exchange’s IT provision. A vendor management function is planned that will go beyond negotiating the best commercial terms from suppliers, and ensure that the group strategy – providing greater proliferation of market data, internationalising access into Hong Kong, supporting algorithmic trading – is communicated to the vendor supply base so their product roadmaps are aligned with the LME.

“Microsoft, Oracle, Cisco and other LME partners have significant research and development expenditure,” says Mr Paine. “Therefore it is right for the LME IT function to leverage vendor relationships and get value from that research and development spend in the supplier base. No one has a monopoly on ideas so innovation might come from the IT department, from the supplier base or other entities in the LME such as the business development function. The important thing is recognising that it could come from anywhere and creating a mechanism to capture an idea, filter it and sponsor it so it provides some central business benefit.”

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