The battle for the London Stock Exchange is on but, regardless of who wins, strength in technology is going to be the most important issue for the exchange’s future. Dan Barnes reports.
In the battle for the London Stock Exchange (LSE) between Euronext and Deutsche Börse, technology has been highlighted as a route to economic viability. A strong command of technology will be needed regardless of which of the two, if either, eventually takes over the LSE.
Change is on the cards for exchanges around the globe. Simon Barnby, business development manager at royalblue, notes: “There’s a lot of pressure on exchanges to redevelop their systems, to scale more efficiently, to accept more throughput, better performance, more asset classes – that’s what’s driving [the change].” To persuade the LSE’s stakeholders that they are the better takeover option, Euronext and Deutsche Börse will have to differentiate their claims of technical proficiency.
Two proposals
Deutsche Börse’s proposal includes “the development of a single IT platform supporting two leading cash equity markets in Europe, London and Frankfurt” to “create the largest equity trading platform outside the US and enable significant reductions in operating and trading costs in the UK market over time” with the minimum of disruption.
Euronext intends to combine “all UK IT services in one data centre with a single network” and move cash trading to a “single system within 18 months of the transaction completing”. As yet, it has taken no decision between SETS (the LSE platform) and NSE (the Euronext platform), preferring to wait for further user consultation followed by full backing of the LSE board. One firm decision that Euronext has made is to “actively pursue the development of the ‘technology roadmap’ initiative as proposed by LSE, involving the migration of the existing cash and derivatives IT systems onto next generation technology” to save cost and increase “functionality, scaleability and product availability”.
Platform options
William Conner, lead analyst, financial services technology at Datamonitor, says that one available option for the exchanges would be to “migrate SETS onto either Xetra (the Deutsche Börse platform) or onto NSE – the advantage being only having to maintain one platform. Both Xetra and NSE are tried and tested platforms installed in various exchanges around the world and therefore seen as world class, robust platforms.”
A strong alternative in Mr Conner’s eyes would be to build a new system altogether. “We would see that as being a good move particularly for the [stakeholders] because then they’d probably try to [put] both cash securities and derivatives on the same platform.” This is something he believes Deutsche Börse is implying in its proposal.
Searching for synergies
Any synergies that can be leveraged will be crucial as cost savings are hunted out. Deutsche Börse makes the point that it has historically worked with third parties and is willing to do so again.
Mr Conner picks up on this point. “Deutsche Börse and the London Stock Exchange both run their systems using Accenture,” he says. “[Deutsche Börse] sold a version of Xetra to the Shanghai Stock Exchange, which was installed using Accenture’s experience so I would expect that they would use an external body to help migrate.” Having a third party familiar with both organisations and their systems could prove to be an advantage, although it can increase costs.
Mr Barnby points out that Euronext has historical expertise in this area: “Euronext covers what used to be four completely different exchanges, Paris, Lisbon, Brussels and Amsterdam, so their system is well proven in the sense of adding new markets to the same platform. From a technology point of view, that makes them look like a good owner.”
He continues: “Even if [the takeover] doesn’t happen, you can see that London has the desire to offer other asset classes and do other things. I think one of the problems is that the technology is a number of years old. With the growing demand for lots of different asset classes, different ways of trading, different instruments on exchanges, algorithmic trading, the systems are constantly having to change, to adapt to the ways things are going.”
