The London Stock Exchange is keen to ensure that its post-trade division keeps pace with the evolution of trading both across Europe and within its own four walls, says Kevin Milne, the unit’s new head.
“There has been phenomenal change in the trading space over the past 10 years,” says Milne. “The changes have reduced the cost and increased the efficiency of trading. These have taken place at a rapid pace but you have not seen that speed of evolution in the clearing and settlement space.”
A combination of technological and regulatory stimuli has transformed trading in Europe’s equity / financial markets in a relatively short space of time. Sophisticated execution algorithms, direct market access and smart order routing have automated the trading desk, and thanks to increasing network bandwidths, confirmations and market data required to make rapid-fire trading decisions can now be delivered in microseconds, allowing traders to hit prices they may have missed before.
In addition, MiFID has fostered the creation of new execution venues, which has slashed explicit trading costs thanks in part to the venues’ adoption of maker-taker pricing schemes.
Equally, the LSE’s own trading operation is evolving quickly. It bought Sri Lankan technology firm MillenniumIT, which will develop a new trading system for the exchange to replace its existing TradElect platform, and has acquired pan-European multilateral trading facility Turquoise, which it will merge with its nascent dark pool platform Baikal. In December last year, the exchange migrated its derivatives operation, EDX London, to a new trading engine supplied by Canadian exchange operator TMX Group, and it plans to launch an electronic order book for retail bond trading in February this year.
While execution costs in Europe have come crashing down, clearing and settlement costs remain embarrassingly high compared to the US, where the Depository Trust & Clearing Corporation charges 66 thousandths of a US cent for each 100 shares it clears. By comparison, the cheapest tariff offered by LCH.Clearnet UK’s EquityClear service, the LSE’s incumbent central counterparty, is £0.01 per trade. The European market remains fragmented, despite attempts to forge inks between clearing houses, making cross border trading cumbersome and costly.
LSE CEO Xavier Rolet has recently taken a stand against high clearing and settlement costs in the UK, blaming complex post-trade processes for stifling the exchange’s growth opportunities.
“One of our key considerations as an exchange group is that when users of our platform evaluate us, they look at the total cost of the transaction. If it is slightly cheaper to trade here but more expensive to clear and settle than other options, then they will look at those other options,” says Milne.
Rolet has identified the post-trade division as one of the key areas for growth. Milne, former CEO of post-trade services firm Xtrakter, took the reins from the LSE’s deputy CEO and Borsa Italiana CEO Massimo Capuano at the beginning of last week, giving the exchange a dedicated post-trade head.
Now he has his feet under the desk, Milne wants to waste little time in turning Rolet’s vision into reality. “The first priority is to get a good strategic plan in place so we can start to set some specific timelines, objectives and activities to get moving as quickly as we possibly can.”
To develop the exchange’s post-trade strategy, Milne has two key assets at his disposal – Italian central counterparty Cassa di Compensazione e Garanzia and central securities depository Monte Titoli, both of which were acquired in the LSE’s 2007 purchase of Italian stock exchange group Borsa Italiana. But he emphasises that third-party relationships will continue to play a significant part in the LSE’s post-trade strategy.
“One of our challenges is to look at how we can grow our existing post-trade assets outside their current markets and expand them geographically and by asset class,” says Milne. “We also need to make sure our relationships with external providers are brought into our plans and that those providers’ business plans are aligned with ours. Increasingly, market users want to see a more harmonised, balanced process throughout the entire transaction.”
In addition to cost-effectiveness and high levels of service, Milne contends that customers also require responsiveness from post-trade services. When launching new trading products, customers need to ensure they can be cleared and settled effectively. However, because of the development gap between the two areas, post-trade services in general have often been slow to the punch, frustrating the front office.
“One of the things we are trying to do, whether through the utilisation of existing internal assets, more productive relationships with external providers or better communication, is deliver clearing and settlement services quicker without sacrificing in any way the safety, security and integrity of the process,” says Milne.
MillenniumIT will play a key role in the speedy delivery of post-trade as well as trading services, according to Milne. “MillenniumIT has given us very smart technology and methodologies and will allow us to increase the speed of deployment, allowing us to keep pace more effectively on both the exchange platform and clearing and settlement sides.”
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