The London Stock Exchange (LSE) will next month complete its most complex technology project to date ­ the consolidation of its IT systems with those of £1.6bn acquisition Borsa Italiana.

The IT merger with the Italian exchange – bought by the LSE in 2007 – ­ entailed the integration of trading systems, networks, mail and infrastructure services and web sites as part of a 12-stream process due to conclude next month.

Recent milestones include the migration of Italian equities onto the LSE’s trading system, TradElect, followed by new functions added last month ahead of the launch of Baikal (see below) –­ which supports a complex trading mechanism known as a “dark-pool” facility. The company has also reduced the latency of transactions to 3.7 milliseconds –­ a vital consideration for any trading exchange.

These projects are part of a new IT framework that was created to underpin the enlarged group. But one of the most important aspects was the bringing together of the IT teams in the UK and Italy, which now form a 300-strong technology department, said LSE chief information officer David Lester.

“We now have one team managing all our infrastructure, from fixed income to derivatives. We have put together one homogeneous IT function rather than having four or five different teams doing the same thing over and over again,” he said.

The Borsa deal was closed in October 2007 and the consolidation plans were in place by January of the following year, but the full integration of staff has only just been completed, said Lester.

“There were some bits that took a little more time ­ – staff were busy doing a lot of things at MTS [the Italy-based pan-European electronic trading platform for government bonds], so collapsing them into the team and slowing them down did not seem the right thing to do. We decided to wait until it was the right time,” he said.

Despite the intricacies of joining the IT of two major bourses, the process progressed smoothly, said Lester, due to the experience of senior teams leading the process from both sides of the group.

Redundancies from the merger were minimal as the expertise available in both countries is complementary, he said.

“We used to outsource a lot of our IT but are now using fewer outsourcers, so there were roles for most of the people and they were quite excited about it. Besides, there is so much to do and I cannot think of positions I could do without,” said Lester.

The Italian IT staff particularly excel in derivatives, fixed income, clearing and settlements, web services and front-end display screens, whereas London-based expertise concentrates on core systems Infolect and TradElect.

LSE decided to end an IT operations outsourcing contract with Accenture in 2007, but signed an extension related to software development work and support until March 2010.

As the end of the contract approaches, Lester expects the supplier will do “a lot less” since the exchange will look to further utilise its internal talent pool for its development needs.

“We are never going to be a hardware or network company ­ – but we are heavily backed by a high-quality operation and really specialist skills, which are quite difficult to get from suppliers, because they tend to be generalists,” said Lester.

“There are some niche firms that provide skills in financial markets and low-latency applications, but not the big guys. In my experience, it is better to have high-quality talent in those services in-house, rather than relying on generalist models
of the larger suppliers.”

Lester said LSE will be looking to take advantage of the skills available as a result of the wave of redundancies in the financial services sector.

“Financial services is a key part of the UK economy and I don’t think we can keep such an innovative crowd of people down – ­ it will just have to be more for less,” he said.

Competition spurs innovation

Following the introduction of the European Union’s Markets in Financial Instruments Directive (Mifid) in November 2007 – designed to liberalise equity trading across Europe – the London Stock Exchange (LSE) faced a new wave of competitors.

Rival exchanges such as Chi-X, Turquoise and Bats have sprung up, and LSE chief information officer David Lester knows that IT is central to remaining competitive.

LSE’s next big technology deliverable underpins the June launch of Baikal, a block trading facility, or “dark pool”, which aims partly to allow asset and fund managers to place large orders without having to first send them through a broker.

Using technology provided in partnership with specialist supplier Fidessa and financial services giant BNP Paribas, Baikal will provide a “one-stop shop for navigating fragmented liquidity across Europe” to fend off rival exchanges or smaller facilities.

Other important projects to be delivered this year include a derivatives trading platform in partnership with the Oslo Stock Exchange and TMX Group, as well as further investment in latency, storage and hosting services for clients.

“Now that the Borsa Italiana integration has been completed, the emphasis of our work has shifted to new initiatives,” said Lester. “We designed TradElect and Infolect in 2003-4, so I think there is an opportunity to look at what is around now, because things are substantially different in terms of technology that is available.”