LSE buys MillenniumIT
ISSUE 19.2, Oct 09
David Lester,
LSE
The question of
whether London Stock Exchange (LSE) will replace its £40 million ($65
million) TradElect platform, supplied by Accenture, has finally been
answered: yes, it will. This hardly comes as a surprise – the issue of
the platform’s speed and efficiency as well as Accenture’s support has
been a hot topic for the market in the last couple of months. Just as
IBS predicted (IBS, September 2009),
the stock exchange went down the route of purchasing a vendor and
utilising its technology to replace TradElect, Infolect and other
applications.
Compared to the bill of $65 million for TradElect, MillenniumIT, a Sri
Lankan developer, is a bargain at $30 million. LSE gains a 100 per cent
shareholding in the company, an offshore development centre (located
near Colombo) with 451 specialists (around 300 in the software
division) and the technology, which boasts high productivity,
flexibility, robustness and considerably lower costs than TradElect.
LSE predicts annual cost savings of at least £10 million ($14.7
million) from 2011/12. ‘The new technology is a lot lighter, nimbler
and easier to install,’ says David Lester, director of information and
technology at LSE. It will also enable faster releases, he adds. The
current wait is three to six months.
This acquisition represents a major shift in LSE’s strategy regarding
its technology – from outsourcing as much as possible (over 95 per
cent, says Lester) to bringing it all back in-house. ‘The world has
changed a lot since TradElect’s design in 2003 [the system was deployed
in 2007], and it continues to change. We need to invest in R&D and
control our destiny in terms of software development,’ he explains. And
with the stated aim of becoming one of the top three global exchanges
by market capitalisation in the next few years (although Lester admits
that at the moment LSE is far off) the pressure is ever-mounting.
The exchange undertook a swift four-month selection process,
‘evaluating 20 alternatives for the future of the platform’ and
shortlisted four companies in August. The ‘extensive laboratory
testing’ showed that MillenniumIT was the optimal choice for LSE, says
Lester. In addition to a multi-asset trading platform, the exchange
will gain other applications, such as desktop clearing and settlement,
and smart order routing. The ultimate goal is ‘to have one of
everything’, explains Lester – one trading engine, one surveillance
system, one order routing solution and so on, instead of disparate
systems. The purchase of a vendor rather than just a platform also
means the freedom of choice for investment in different areas of
technology, whether it be existing software or new grounds. ‘We don’t
want to be like an MTF with ten guys doing all the software
development,’ says Lester. ‘We want to address the entire suite of
products and MillenniumIT gives us that scale.’ Indeed, its offshore
development centre – ‘a hotbed of top graduates’ – with 94 per cent
being top-class alumni from Sri Lanka and around the world, including
MIT in the US, caters for such magnitude of scope.
The new platform will be based on Linux and Solaris, while TradElect is
based on Microsoft’s .Net technology. The choice of the latter, which
has raised quite a few eyebrows in the market, is defended by Lester.
He claims that LSE is coming off TradElect not because of the .Net
technology itself (although its trading speed is 2.7 milliseconds
compared to Linux-based Chi-X’s 0.4 milliseconds), but ‘for more
control, less costs, and the ability to build and innovate’.
Furthermore, he describes LSE’s experience with .Net as ‘very
positive’. With LSE and its Italian subsidiary, Borsa Italiana,
converting to Linux, Microsoft’s .Net offering is left with virtually
no takers – the only remaining one being Johannesburg Stock Exchange
(JSE). ‘JSE has been aware for some time that the LSE has been
considering its trading technology options,’ says Leanne Parsons, JSE’s
chief operating officer. The South African exchange ‘will be holding
discussions’ with its UK counterpart regarding the latter’s technology
replacement project. However, it is ‘a bit too early in the process’ to
go into any detail, she adds.
A Norwegian exchange, Oslo Børs, which was supposed to start using
TradElect in February 2010 (as a result of a service provider agreement
signed by Oslo Børs and LSE in March 2009), will now also migrate to
MillenniumIT’s offering.
Microsoft did not provide any comments on the above cases when
approached by IBS, but claimed that most recently it had ‘completed
three different proof-of-concept projects for a major international
stock exchange that demonstrate Windows Server 2008 and Microsoft .Net
can successfully support very low latency trading activities’. It
defined these as being in the 100 microsecond range using standard 1
Gigabit Ethernet in a configuration with multiple network hops in the
trade execution path. ‘With the addition of Microsoft Network Direct,
that latency can be reduced by 50 per cent more.’
Tony Weeresinghe, MillenniumIT’s CEO, emphasises that the application
of Linux at LSE will differ from other trading entities. Linux platform
codes at LSE will not need to be modified to enable further upgrades,
he explains. ‘MTFs, like Bats or Chi-X, modified them to get high
performance but now cannot upgrade to other newer versions that are
coming from elsewhere.’
Another ‘fundamental change’ for LSE is in the motivation aspect,
believes Lester, as now LSE and MillenniumIT ‘are joined by a common
motivation’ – something that the exchange and its suppliers lacked
before. Lester does not single out any specific company but note that
‘sometimes with the suppliers you have different motivations, because
that’s the nature of who you are dealing with’.
The integration is expected to last about 18 months, although LSE does
not confirm this schedule. Lester emphasises that he wants it done ‘as
quickly as possible’. The acquisition transaction closes in
mid-October, with over 90 per cent of irrevocable undertakings already
received by LSE. Weeresinghe will continue in his role of
MillenniumIT’s CEO and Lester will become the chairman of the new
business.
Weeresinghe describes the market’s reaction to this acquisition as
‘positive’, but there has been a ‘no comment’ reaction from
MillenniumIT’s major customers in Europe. London Metal Exchange (LME)
told IBS that ‘it’s a matter for the LSE and MillenniumIT’, and ICAP
stated it doesn’t comment on its relationships with IT service
providers.
The newly-acquired entity will open doors for LSE to the lucrative
Asian market and its exchanges, many of which Weeresinghe ‘knows
personally’, notes Lester. In the European markets, Lester expects
‘incredible equity trading growth in the next one to five years’, which
he names as one of the key reasons for technology modernisation. ‘In
the US, there are 50 million trades a day on a typical day, the trade
ratio [messages per trade] is 150 to one, which works out something
like 7.5 billion messages across the US markets – and that’s equities
alone,’ he notes. ‘At present, we have up to 100 million messages a day
on TradElect. If we are to scale up, we need to be ready.’