About the Company
BOASTING a 300-year history, the London Stock Exchange is one of the world’s most prestigious financial institutions, sitting at the heart of London’s formidable financial services industry.
Its varied activities are divided into three chief business components, the first of which involves supporting new companies floating on either of its two markets, the Main Market and AIM. The second business line relates to the trading of those companies once listed, while the third involves the distribution of associated data.
The success of these components is wholly dependent on the use of leading-edge technology, making the LSE one of the most technologically-driven operations in business today. Recently, however, major changes in the financial markets – in particular the introduction of the pan-European Markets in Financial Instruments Directive (MiFID), which went live on 1 November 2007 – have increased the competitiveness of the exchange landscape across Europe.
In order to compete effectively in a post-MiFID world, CTO Robin Paine and his team have undergone a four-year implementation, dubbed the Technology RoadMap programme (TRM), in partnership with Microsoft. The aim of the TRM, which is nearing its final stages, is to ensure that the LSE can offer its member firms a world-class information and trading service that is not only fast, but highly available and resilient.
During the implementation, the LSE has had to fight off hostile takeover bids from both Macquarie Bank and Nasdaq, but has emerged not only unscathed, but arguably fitter – aptly underlined by its recent acquisition of the Borsa Italiana. The integration of Italy’s chief exchange promises to present its own set of challenges.
Information Age (IA): The London Stock Exchange (LSE) is in the final stages of a four year long IT overhaul – the Technology RoadMap (TRM). That’s a long time for any organisation to commit to a technology programme. What led you to make the major investment?
Robin Paine (RP): What we identified around four years ago is that the businesses that interact with stock exchanges around the world were investing very heavily in technology and becoming more electronic in the way they interface to us. And there were also some other macro changes taking place in the market, for example the proliferation of hedge funds. So four years ago we recognised this enormous change was developing and we recognised that because technology was at the heart of all three businesses [see About the Company], we needed to invest substantially in our own technology, to keep ahead of this changing and growing demand in the customer base.
From that recognition we embarked upon a programme of very substantial technology investment [the TRM]. Two major components of this programme were the ‘go live’ of Infolect, the technology responsible for disseminating real-time prices [to our member firms], and the other was the ‘go live’ of TradElect, our core trading system.
(IA): How has the advent of MiFID changed the picture?
(RP): MiFID obviously has many components to it, and MiFID itself is only one component of a very broad initiative across Europe – to harmonise financial services. MiFID changes the competitive landscape of exchange activity across Europe, which we recognised many years ago when we embarked upon this.
There has been competition in the past in the exchange space and there will be in the future, and there are many ways you can compete effectively: one way is by providing highly available services; another is by providing very cost-effective, scalable and performant services. We try to address all of those, but technology really is instrumental in addressing quite a few if not all of those levers. So this investment in TRM will allow us to reduce our IT cost base by one fifth; the TRM will also dramatically increase our ability to scale up our core trading system. It has dramatically reduced the latency for the time it takes for someone to execute an order on the market, and reduced the latency for getting real-time prices sent out to the market. So when there is a choice of where to trade, then the exchange that provides 100% available services, lowest latency, together with other factors (such as a reasonable pricing structure), is more likely to win. Technology is really at the heart of us keeping that competitive advantage.
(IA): How did you go about choosing your technology partners in order to ensure you retained the edge against your competitors?
(RP): At the beginning of this we had to make some technology choices, and we did so using a very structured process – by defining the design principles that the TRM was trying to achieve and setting up some very specific measures against which our technology choices were made.
TRM strives to build technology that can support multiple asset classes – so we wouldn’t build technology that just runs our business as it is today but build a technology that can accommodate different business [needs] in future, and asset classes such as bonds and derivatives.
We wanted something scalable. As our [trading] volumes accelerate very dramatically, we need technology that can accelerate with that growth, and we need technology that’s agile enough to build quickly and cost effectively. We defined our objectives and then went out to market and looked at a number of partners we could use to implement this vision.
That was where Microsoft came in. We looked at their whole suite of technology from their development environment through to their databases and operating systems, and we decided that their technology was best aligned to achieving this range of design principles. We also found that they were willing to operate as true partners with us and to engage throughout the whole four-year programme rather than on particular components within it where there was potential revenue for them through licence sales. So we felt that not only did their technology stack up against the design principles, but they were genuinely able to act as a partner. They recognised at the most senior levels what we were trying to achieve here and that was important to us.
Name: Robin Paine
Organisation: London Stock Exchange
Highlighted challenge: To provide a world-class trading platform that will allow the exchange to compete effectively in the increasingly competitive pan-European trading landscape.
Background: Pain has held various IT management positions covering both IT service delivery and IT programme management at banking giants ABN AMRO, UBS and Morgan Stanley.
(IA): Availability as clearly a key differentiator but what about resilience. After the 2005 July bombings and other disruptions, are your trading members more concerned about the resilience of your systems as well?
(RP): Throughout the TRM programme there was an enormous amount of customer consultation, and we did invest substantial efforts in making our existing client-base aware of what we were trying to achieve with our TRM investment, and how they would benefit from it. Part of that investment was about explaining the architecture of TradElect [see About the Company], and how we address the issue of high availability and low latency.
So TradElect and other core TRM technologies were designed from the beginning to be world-class, if not world-leading in terms of availability. TradElect is designed to run in more than one physical location; it runs across two data centres, with a data centre arbitrating across the two; it runs in an ‘active-active’ configuration. There’s real-time replication taking place between the two facilities, meaning before we go out to our clients and confirm the state of their order, we make sure that the state is replicated more than once. If we lose a server, component or site, trading can carry on. Building that is extremely complex and that’s why it took us four years.
(IA): How flexible is that architecture? The LSE’s recently acquisition of Borsa Italiana must have thrown up some major challenges in absorbing the Italian exchange; how will the TRM architecture help?
(RP): The IT element of the integration is a very substantial part and we’re at a stage today where we have already made some very clear decisions about what our future technology strategy is, and it’s based upon all our latest investment in the TRM. So TradElect and Infolect will be the platforms we use to support the Italian equities market, and we have made clear we will migrate the Italian cash equity market onto TradElect by September 2008, with work on that programme already under way.
When we started work on the trading system, it was built from the outset with the ability to support different time zones, currencies and asset classes, so we’re able relatively quickly – within 12 months – to move that Italian market onto the TradElect technology. We knew there would be exchange consolidation, mergers and acquisitions. That was another reason why agility was built in.
The integration programme itself is broad and will include converging websites, data warehouses, trading systems, networks and network systems like email. We’ve made public the savings and synergies we intend to make and [the integration] is a large part of that.
We have to realise the benefits of the [Borsa Italiana] deal through technological convergence, but that isn’t just about trading. There is a huge challenge ahead which isn’t just about the trading system but I genuinely think through TradElect and other components of TRM we have the foundation to do this.
HSBC trades from a clean slate