The London Stock Exchange (LSE) is evaluating proposals from several firms to provide technology to Baikal, its dark pool, after the collapse of Lehman Brothers in September prompted the exchange to abandon partnering with a single broker.
“We have been exploring alternatives and we are very nearly at the point of reaching a conclusion on the best way forward,” said LSE CEO Clara Furse at the exchange’s half-year results presentation today.
Speaking to theTRADEnews.com, John Wilson, the newly-appointed CEO of Baikal, said the partner evaluation process could be complete in two to four weeks. “We will minimise the number of providers to minimise complexity,” he said. “Ideally there will be two to three service providers.”
The LSE originally intended to launch Baikal in Q1 next year, but now expects the platform to open for business in Q2. As well as being a non-displayed or ‘dark’ pool of liquidity, the LSE intends Baikal to be an aggregator of liquidity from a variety of sources, including brokers, buy-side firms and other trading platforms, such as MTFs.
Baikal was originally a joint venture between the LSE and Lehman Brothers, under which Lehman would provide the algorithms and anti-gaming technology to the pool, although the companies had invited other market participants to take stakes.
But following the collapse of Lehman, the LSE has re-evaluated the Baikal model. Feedback from the buy-side suggested that relying so heavily on a single bank had been a mistake, according to Furse. “One element that didn’t go down a storm with the buy-side was that a single investment bank played a particularly large part in Baikal,” she said . “We are not going with the original model. We believe Baikal MkII will be better than Baikal MkI.”
Japanese investment bank Nomura, which acquired the European operations of Lehman Brothers, has been in talks with the LSE, but Furse said, “We are keen for Nomura to play a part, but it is not the part Lehman would have played.”
As a result, Baikal’s technology is likely to be drawn from several sources. “We are definitely not using Lehman technology for the whole system, but there may well be components of the Lehman technology we would want to use,” said Wilson. “We may well use components of the technology from other companies.”
Wilson said the extent of Lehman’s original involvment may have put off would-be members of Baikal. “We now wouldn’t have one investment bank holding 50% of the venture because the willingness of other market participants to come in dramatically reduces,” he said. “It needs to be a market solution.”