The London Stock Exchange (LSE) faced an ambitious timeframe for migrating its main market onto its new Millennium Exchange trading platform. News last week that it is delaying the migration until 2011 to help cope with network upgrades has been welcomed by customers and commentators.
The LSE announced on 3 November that the migration would not take place shortly after 14 November as planned, but in 2011, affirming what many had already thought likely. “I think they had decided before last week that the migration was likely to be delayed,” said Herbie Skeete, CEO of exchange information provider Mondo Visione.
The project had already been moved from its initial go-live date of 1 November following requests by customers for more time to carry out testing. But the confirmation of a longer delay was made after a two-hour outage on 2 November on Turquoise, the multilateral trading facility (MTF) majority owned by the LSE, which migrated to Millennium Exchange system on 4 October. The incident, which was caused by human error according to the exchange, is being treated as suspicious and has resulted in UK regulator the Financial Services Authority being brought in to investigate.
Hirander Misra, CEO of low-latency systems supplier Algo Technologies, says that the challenging timeline was a rational strategic move given that the exchange was losing market share and had two trading systems – Cinnober for Turquoise, TradElect for the LSE ¬– that were being publicly discussed as unable to provide the required speed for some market participants. “The ”big bang' approach was always going to be aggressive, even in a best case scenario,” he adds.
“It was more than aggressive – it was rash,” says Paul Pickup, director of exchange consultancy Trading Technology. Typically it takes two years to implement a stock exchange system he points out, suggesting that the LSE should have planned on installing the new system on smaller markets that use TradElect first for a test period, either within the LSE Group, such as the Borsa Italiana, or on other venues such as the Johannesburg Exchange which currently runs on TradElect. By default the new plan will give the LSE greater visibility of any potential issues that could crop up on Turquoise before changing its own platform.
Representing 3.01% of October's pan-European equity market by turnover compared to the 12.13% for the LSE, according to Thomson Reuters' Equity Market Share Reporter, moving Turquoise onto the platform was a simpler project. However Pickup asserts that leaving only four weeks between the two projects – as initially planned – did not allow time for sufficient testing before the exchange went live.
Upon finding the timeframe to be too tight, it was only sensible for the exchange to move the date, says Misra. The outage of NYSE Euronext's European markets on 19 October demonstrated that the appetite of market participants to trade on MTFs has risen to the point that an outage at a primary market doesn't damage volumes on alternative venues. An outage of any duration could prove to be a catalyst for migrating liquidity onto other venues, he argues.
The LSE has not indicated that the delay reflects a change in its strategy and was unavailable to comment prior to its interim results presentation on 18 November.
However the perception of a slower approach appears to be appreciated by all parties. “The market feels a lot better if [the LSE] gives time for more testing to be done,” asserts Skeete. “And that doesn't just mean internal testing within the exchange, it is end-to-end testing that involves all of the constituents from member firms to independent software vendors.”
Misra adds that an unintended bonus for some trading firms over the Christmas period will be the arbitrage opportunity between trading LSE-listed stocks on the Turquoise platform which claims to have a 400 microsecond roundtrip latency and on the LSE's current system which the exchange claims to have a 1.4 millisecond roundtrip.