London Stock Exchange buys its own offshore IT capability

The LSE will scrap all its current trading systems in favour of platforms developed by MillenniumIT

The London Stock Exchange (LSE) has acquired Sri Lankan firm MillenniumIT for $30m (£18m) to develop its core trading technology.

Under the new set-up – which will replace TradElect, Infolect, and other systems from next year – LSE expects to reduce IT costs annually by at least £10m from the fiscal year 2011-12.

LSE said it hopes the new platform will provide “substantially lower latency, significantly higher capacity and improved scalability”.

The exchange also wants the system to provide richer functionality, particularly for Italian clients, while accommodating both trading after hours and stop-loss orders and enabling multi-asset class functionality and quicker speed to market for new products.

As a result of the deal, expected to complete next month, expenses associated with the maintenance of the exchange’s current trading system TradElect will pile in. LSE will take the cost as operating expenses, expected to reach more than £30m in the next two years.

“Going forward, as well as serving existing and new clients, [MillenniumIT] will be the group’s in-house software development team, gradually replacing our current suppliers and bringing intellectual property and know-how fully within the company,” said LSE chief information officer David Lester.

“We look forward to introducing their proven trading platform before the end of 2010, which will provide our clients with sub-millisecond trading latencies and give the group a very fast, multi-product, cost-efficient, scalable trading platform,” said Lester.

“The transition will be carefully managed, with further enhancements to TradElect planned in the interim."

While accessing high-level IT skills and generating savings may seem a positive move for LSE’s technology future, placing all bets on a small organisation abroad may also bring questions over the validity of the exchange’s new development model, according to Mark Kobayashi-Hillary, director at the National Outsourcing Association.

“The LSE strategy seems to be two-fold; replace existing systems with the MillenniumIT technology, then use this resource as their in-house offshore development centre. It's instant off-shoring,” he said.

“The exchange hasn't been about a physical trading floor for years – it lives or dies on the strength of its technology, so this seems an unusual approach as it is blending a need to reduce IT costs by locating a team in Sri Lanka, with a large tech refresh programme. It is almost as if they are betting their entire IT shop on this small outfit in Sri Lanka. I hope they have done some strong due diligence on these guys."