London Stock Exchange switch to Linux / Solaris from technology

posted Oct 5, 2009, 10:50 PM by Unknown user

LSE buys MillenniumIT

ISSUE 19.2, Oct 09

David Lester,<br> LSE

David Lester,

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.’