LSE Considers Future of TradElect Platform; MillenniumIT Waits in the Wings

Following a couple of weeks of rumour and intrigue, the received wisdom now appears to be that the London Stock Exchange is indeed considering the future of its TradElect trading platform, introduced with much fanfare as recently as 2007. With new CEO sweeping a broom through the corridors of St. Paul’s Churchyard, it appears that TradElect’s turnaround latency – at a once market-leading 3.7 milliseconds – can’t keep up with newcomers like Chi-X Europe and Bats Europe.

But how does the exchange plan to keep up in the low latency arms race, given that many of the suppliers of high-performance exchange trading platforms are, in fact, its competitors or fundamentally reference clients of its competitors?

Certainly, the competing versions of the Inet platform offered by Nasdaq OMX and Chi-X Technologies, part of Instinet’s Chi-X Global, would be offlimits to the LSE. And while Nordic platform supplier Cinnober has scored a string of exchange system successes, its supply of the core trading platform to arch-rival Turquoise would almost certainly put it out of the running.

The smart money now is that the LSE will turn to Sri Lankan software house Millennium Information Technologies (MillenniumIT), which already does some custom work for the exchange and offers its own exchange trading platform. Indeed, MillenniumIT recently released latency figures for its platform suggesting order latency of 130 microseconds. The platform was tested using the Intel Xeon 5500 processors at Intel’s FasterLab facility near London.

According to Ajit Samaranayake, chief scientist at MillenniumIT, “We registered a 130 micro second order latency in the first benchmark run, and expect this figure to drop by another 40 micro seconds when the final platform specific tuning is done.” The latency measurements were conducted using a day’s orders and trading rules from a tier 1 stock exchange.

Whether the LSE upgrades or replaces TradElect, it will likely call upon internal resources to lead the development, after ending its outsourcing deal with Accenture (which will cease to provide services in March 2010) and bringing staff back in house. It also picked up IT expertise from Borsa Italiana, especially in areas such as fixed income and derivatives trading, clearing and settlement, and web-based user interfaces.

The LSE’s technology group is now around 300 strong, and the current management regime is apparently keen on keeping core expertise internally, while working with specialist external vendors as needed. For example, in developing its Baikal dark pool, the LSE turned to Fidessa for order management and smart order routing technology and QuantHouse for market data.

Although TradElect was introduced by the LSE in 2007, it’s based on a design that kicked off around 2003. The cost of the system – developed by Accenture – has been put by some at around £40 million. And although its 3.7 millisecond turnaround time is no longer state of the art, it’s not bad considering the term ‘low latency’ had yet to be coined at TradElect’s inception five or six years ago.

Some geeky bloggers have suggested that the system’s Microsoft Server 2003 and SQL Server 2000 operating stack, which runs on Intel-based HP ProLiant servers, represents a fundamental design flaw. Highlighting a failure of the system in September 2008 (which the exchange said was caused by a software bug), they suggest that a Linux-based system would be better suited for mission-critical applications and for minimising latency.

Linux is indeed used by the NYSE and Chicago Mercantile Exchange for its core systems. On the other hand, for the LSE, it’s likely that significant latency reduction can be achieved by upgrading the existing core technology to Microsoft’s latest HPC and database software, and upgrading the hardware to systems running Intel’s latest Nehalem chips.