Exchange for the better

Migrating to a new IT platform is never simple, particularly in an environment as complex and demanding as a stock exchange. The wrong software architecture or management approach can have dramatic consequences, as the London Stock Exchange Group (LSEG) found out in 2007.

That year, the exchange went live with its new TradElect platform. A Windows-based system, it was designed to reduce trade execution times to ten milliseconds, pedestrian by today's standards but a tenfold improvement on previous levels. After initial success, cracks began to appear.

A succession of minor technological failures came to a head in September 2008 when a seven-hour outage put paid to almost an entire day of trading. The situation was exacerbated by the fact that mortgage lenders Fannie Mae and Freddie Mac had just been bailed out by the US Government, virtually ensuring a good day on the world's exchanges. Although it was never officially confirmed that TradElect alone was responsible for the trading outage, the death knell had been sounded. In July 2009 it was scrapped.

Reputation to repair

Now led by a new CEO, the LSEG had some big decisions to make. To help repair its reputation, it would have to bring in a new trading platform and roll it out in a seamless fashion. The solution would have to be agile and quick enough to outstrip the performance of competitors such as Chi-X, whose solutions had run rings around TradElect. The responsibility for this transition was given to CIO Antoine Shagoury.

Meeting at his office in the LSEG building in the shadow of St Paul's Cathedral, the Financial News's CIO of the year seems genuinely upbeat about his tenure so far.

"It's been a pretty exciting year for us," he says. "Many of the things we've done have been transformational, not just for the company but for our market. In the past we were not competitive in terms of speed and execution. But after
a process of modernisation, I think we've given ourselves the opportunity to compete and interact with the marketplace much more effectively."

The turnaround started with the October 2009 decision to migrate to the Millennium Exchange system built by Sri Lankan software developer Millennium IT. Millennium IT was acquired by the LSEG for $30 million and, although the new platform experienced some early teething problems, it has, on the whole, been a great success. The LSEG's cash equities market can today boast consistent processing speeds of below 120 microseconds, with its multilateral trading facility (MTF) Turquoise achieving rates of less than 100 microseconds.

"I don't think anyone in the market has ever done what we've done in this short a time period," Shagoury proclaims. "In all, we have completed five migrations, with the most notable being the Millennium Exchange roll-out for MTF, followed by the main market and cash markets in the UK. Everything we've tried to do has been level-setting and feeds directly back into the business."

A successful migration is, in Shagoury's view, down to a handful of factors. Most important is an in-depth understanding of the needs of customers and the marketplace, which begins with a period of in-depth business analysis. The view of the markets needs to be micro-structural.

"It's not just about the macro view, but gaining an insight into each of the markets we serve at the deepest level," he explains. "We are lucky in that, when you look at LSEG's numbers, there is a phenomenal mass of experience in this area that we have been able to leverage. Millennium IT also has a very strong pool of analysts and product managers that provide the critical link into the development process. The requirements need to be properly interpreted before they can be transferred into software or code."

Shagoury describes the actual process of migration as "like trying to change the wheel on a lorry when it's going at 40mph".

It needs to be managed with discipline and moulded into a well-defined, easily repeatable procedure. The key to this is service-orientated architecture.

"You have to make it less scientific and more procedural," Shagoury explains. "Standardisation is important - how do I create common software, processes and management? If you combine this with service-orientated technologies, which allow you to adopt a building block approach, it gives you the ability to keep adding to the system. So altogether it requires a disciplined approach, built on a standardised platform, with flexible software that allows users to intuitively interact with the system."

This procedure should become easier with every repetition, and through subtle manipulation of individual building blocks, new products can be constructed and put to market in the space of hours.

"If I have one traded instrument that is governed by a certain set of rules, why can't I use it to create another?" Shagoury explains. "Today, if you want a new investment instrument, it can be up and running in days. In the old days, which weren't really that long ago, it would have taken six months or a year. When we went through the initial migration to the Millennium Exchange, it was brand new and therefore the process took longer. But when I look at the follow-ons, they were much easier. As the tools and processes mature, migration becomes smoother."

The question remains

Millennium Exchange may be up and running, but the big question remains - how can you prevent an outage similar to that which marked the end for TradElect? With events happening faster than a person can instinctively react, careful analysis of processes and the creation of good early-warning mechanisms is vital.

"Tens of thousands of trades can happen in the blink of an eye," Shagoury says. "And when you multiply that by however many markets you are dealing with, the compound exposure is huge. We are constantly trying to embody in our systems the logic needed to react to market events. The first stage is to look at notional or investor risk. How do I create the tools that can immediately protect the investor if something goes wrong?"

Technology alone can't answer this question, and the LSEG relies heavily on the knowledge and experience of
its employees."We have experienced people with the ability to see problems in action," Shagoury says. "If you have excessive market volatility, which isn't uncommon at the moment, the key is to define what's triggering it and where the thresholds are. To find out, you apply the skills and intuitive understanding of the people who run the market, the service desk and the regulations team, you enhance their tools and you help them react in real time."

The need for real-time reaction from such a broad range of employees makes intra-company communication particularly important. In line with upgrading core trading technologies, the LSEG is investing in collaboration and communication tools. While 'less sexy' than other business projects, Shagoury views it as especially important.

"I think a lot of people don't focus strongly enough on getting their teams to communicate in real time," he says.
"You have to foster group awareness, so whether somebody is in London, Milan or travelling in Asia, they can offer their perspective on a problem. This gives a 360° view, rather than the 180° you may have had before."

As well as greatly improving the exchange's ability to solve problems, Shagoury sees better communication as a way of enhancing the working lives of employees. By learning lessons from social networking, in particular, a company can give an employee a stronger stake in what they are doing.

"You'll never have true social media, as businesses have to abide by regulatory obligations and face other related restrictions," he says. "But using things like social media has become so intuitive that it's almost inhibiting to come into work and find you can't do the same things. When employees start to interact with their own systems, possibly using smartphones, participation and response times improve considerably."

The right technology and a collaborative management approach have worked out well for Shagoury and the LSEG. Global markets are sure to be volatile for some time - at least the same cannot be said about the exchange.