CTO interview: Technology and tradition at the London Metal Exchange

By Graeme Burton
23 Jul 2014 View Comments
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On the wall above the desk of Robin Paine, chief technology officer of the London Metal Exchange (LME), is a large wide-screen television.

It hasn't been put up there for a spot of sneaky daytime viewing of the Commonwealth Games. Rather, it provides a dashboard of up-to-the-second data about the performance of the LME's IT systems. The idea is that if something starts to go awry, Paine will be able to lead a team to solve the problem before the Exchange's users even know something's up.

Further reading

That big-screen dashboard sits opposite an even larger white-board, which sketches out a plethora of new projects and where they will interact with, and impact, the LME's core systems.

Responsible for some 80 per cent of the world's trade in metal in its various forms, the LME's systems are real-time in more ways than one: in addition to the online trading platforms the Exchange provides to users, it is unique in Europe in maintaining a traditional, open-outcry trading floor called The Ring in which member organisations can trade directly with each other.

Outside in
Now, the organisation is gearing up for a whirlwind of new IT projects following the successful "insourcing" of IT operations in which more than 100 staff from its IT partner Xchanging were brought in-house. "We didn't feel that it was right that technology was outsourced to a third party. We thought it was right for both the staff, our shareholders and our customers that IT is brought much closer to the 'direction' of the Exchange," says Paine.

A wide range of activities had been outsourced, including "system operations, the core administration of our business systems. IT strategy and IT management was within the LME, but the delivery of projects and IT services, from networks through to applications, had been outsourced, successfully, since 2005," says Paine. "It was never an issue of quality."

Part of the reason for the insourcing is that as IT demands on the Exchange have grown enormously since 2005, it will help improve agility, better enabling the LME to plan and deliver the various new projects Paine is planning.

"Since insourcing, for example, I have engaged in much more proactive communication about our roadmap. In the past, only when we got to the point of a project being initiated would we engage our third-party outsourcer to start to mobilise. Now I can talk more openly to staff about the direction the organisation is heading in," says Paine.

Indeed, the LME will continue to work with Xchanging, which manages one of its two UK-based data centres, and its outsourced development partners - Colombo, Sri Lanka-based Millennium IT and Cinnober, a Stockholm, Sweden-based financial services software specialist.

Crystal clear
One of the biggest projects on the LME roadmap at the moment is the launch on 22 September of LME Clear, the Exchange's new organisation to administer the clearance of trades. "At the moment, the LME performs trading, matching and 'warrant management'. Those are the three principal activities. Clearing of trades is performed on our behalf by the London Clearing House," says Paine.

From 22 September, though, the clearing of trades will be performed by the LME's own internal clearing house, called LME Clear. What that will mean for users trading on the Exchange is that they will only need the one connection to the LME in order to conduct all their business. "They will be able to execute trades, match those trades, do trade reporting, and do clearing - one connection to use the full range of services.

"To create that, we need to make changes to the existing LME systems and create the new clearing capability, which includes systems to manage risk, collateral and so on... We are now in the depths of the testing phase ahead of launch," says Paine.

Of the three major elements of LME's IT, the trading system was built by Cinnober, the matching software was built by Millennium IT, and LME Clear will also be based on Cinnober's technology. "To build the clearing system and many of our other systems, we do rely on partners. A lot of it is built in Java and runs on Linux," says Paine.

The LME also uses Oracle Solaris as a platform, as well as assorted open source tools for security event monitoring and systems management. "But the principal operating system for our real-time systems is Linux," he adds.

Paine continues: "We run most of our applications in the Java environment. So an important component is the Java virtual machine (JVM). That's an important layer, and things like real-time application execution are important too. So getting the operating system right - and you can do this on Solaris or Red Hat Linux - and getting the JVM configured just right is essential."

While clearing is the largest initiative on Paine's crowded roadmap, other recent projects have included preparing technology for EMIR, the European Market Infrastructure Regulation, a European Union initiative intended to increase the stability of over-the-counter derivative markets, completed at the end of last year; as well as LME Wire, a new service launched in February for trade reporting. LME Wire is intended to comply with different new regulations that require trades not conducted on the Exchange to be reported to a central repository. That was done in three months, says Paine.

The Exchange is also a big user of Informatica, he adds, as both a data store and a data distribution mechanism between the organisation's different IT components - trading, matching, clearing, reporting and so on.

Risk management
Intriguingly, but perhaps not surprisingly for an organisation that literally runs in real-time, Paine's IT team at the LME also operates a rigorous risk management process for every project they run.

"Management of risk is the principal activity of what the LME does: it's about protecting price risk out to the future. The same methodologies are applied in IT. There is a staff risk process, change risk, project risk, financial risk and so on.

"We do it at a departmental level, IT level and a project level. So each project has a risk register, a steering committee of risks and a risk-mitigation plan. Prior to a 'go' or 'no go' decision we would review those risks and determine whether they are acceptable or not," says Paine.

Those risk assessments also take into account supplier risk on a number of levels, he adds. "Supplier risk encompasses whether they are in a particular geography carrying a certain risk, or whether they are of a certain scale and have a 'key man dependency', or maybe we fear the rate of change for them might be too high and how we might control that," says Paine.

"We also take external guidance on how to quantify and mitigate risk. We have an internal audit function that looks at projects and operational risk. And we are an RIE - a recognised investment exchange - regulated by the Financial Conduct Authority. As part of that we have an obligation to them to run in compliance with their policies and keep them appraised of risk and the way it is managed."

The LME also conducts in-depth code testing and auditing via a "substantial" in-house IT test team that takes code built both by suppliers and developed internally and subjects it to both functional and non-functional testing. "We try to automate that testing to make sure it's efficient. We have test systems that participants can access and we are looking at technology like Veracode that can profile software and look for vulnerabilities in it," says Paine.

Investing in the Ring
However, arguably the most eyebrow-raising IT investment at the LME is its continued backing for the Ring, the kind of trading floor that most people will think had disappeared with the advent of the internet.

It is the last of its kind in Europe, but the LME plans to invest £1m bringing it up-to-date with new information systems conveying data on bigger "wall boards", as well as better communications systems, including mobile support.

Indeed, clerks today still take orders over landline telephones placed around the outside of the Ring, trailing long telephone handset cables as they relay urgent orders to traders before each session ends in scenes reminiscent of Wall Street or Trading Places.

The reasons for maintaining this traditional trading floor are manifold, but the LME's big clients often prefer to use the face-to-face trading environment, which also provides a valuable mechanism to help guard against market price-manipulation, says Paine, which is an ever-present risk on any exchange.

"We had a complete review [of the Ring] and we think it still serves a purpose. We think it co-exists well with the electronic trading system and the telephone market, too," says Paine. Furthermore, although it accounts for only around five per cent of the LME's volumes - typically peaking just before lunchtime and just before home time - it is highly liquid and trading volumes are stable.

Strictly speaking, though, it is not quite the last such trading floor in Europe - the other one is at the LME's back-up facility in Essex where, presumably, many of the Exchange's traders hail from.

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