With financial centers throughout the world engaged in a continual battle for supremacy, a vast new computer system for the London Stock exchange LSE has become crucially important for the whole future of the city. With the New York Nasdaq exchange trumpeting its role in financing the major names of information technology in a TV advertising campaign aimed at British investors, London traders became uncomfortably aware that unless their own technology could match that across the Atlantic, competitors would be snapping at their heels. The London’s Stock Exchange’s experience of computer-based systems has not been a happy one. Memories are still fresh over the 70m pounds blown on the disastrous TARUS settlement system, which was replaced by the Bank of England’s sponsored CREST system. This time it had to be right. It took three jumbo jets and 17 trucks to move the hardware supporting the LSE’s new automated order driven system from the US. It then took 23 kilometers of cable to wire it up. With 20.5 million pounds invested, the LSE is banking on the new system maintaining London’s edge as a leading financial center.
By Justin Pugsley
The system called SETS (Stock Exchange Electronic Trading Service), became operative on October 20 and puts the UK equity market, from a technology point of view, on a par with other leading European and North American bourses. Many brokers believe the new system is long overdue. One of them, Credit Lyonnais Laing, said in a report that SETS should better fulfill client needs and is faster than the old quote driven systems known as SEAQ (Stock Exchange Automated Quotations System), which runs on a trading platform called Sequence. SETS, developed for the LSE by Andersen Consulting, matches buy and sell orders electronically, greatly reducing the need for telephone negotiations and increases the speed of transactions. A crucial feature should be to reduce bid and offer spreads to 0.10-0.15% as seen in France and Germany, compared with 0.60% for stocks of the top UK companies. Many institutional investors regard UK spreads as too wide. The hardware is three K20,000 Tandem Himalayas using a D33 operating system (Developed by Tandem) and sports 44 CPUs and a 400 gigabyte memory. It uses an X25 network which links the Exchange to members’ sites throughout the market. Most will be accessing the system via workstations from information providers Reuters and ICV. The ‘Order Book’ can support up to 275,000 trades per day and this limit is imposed by disk capacity, which can be added to. This is more than double the highest-ever volumes, leaving plenty of capacity for expansion or for dealing with a market crash when volumes suddenly swell. The system can handle 250 messages per second. Although the Exchange boasts the technology as revolutionary, Jeremy Oates, associate partner at Andersen Consulting, told Computergram that this isn’t really the case. Although it is very sophisticated, I wouldn’t call it cutting edge, he said. One of the reasons it is so stable is that the technology is well tried and tested. The system was first thoroughly tested in house and then mock trading sessions were carried out with selected member firms. It enabled us to iron out one or two glitches, otherwise it went extremely well, he said. He explained that it was developed bottom up and based on Sequence. One of its most important features is its flexibility. It can match business based on the best available price or wait for the buyer’s or seller’s price to be met before being matched. It can also match lots of small orders with one or a few large ones. However, Oates doesn’t see the system it developed as a basis for a business in itself. To function properly it needs deep liquid markets and it’s not often this kind of work comes up for the major exchanges, he explained. Although the experience gained has been useful. There is a lot at stake for the Exchange and as Credit Lyonnais Laing put it, the LSE cannot afford a flop. According to Laing, they have already spent 90m pounds on Sequence with member firms probably spending a similar amount making their software compatible. Just to make sure it does function properly, the system employs 20-30 people and most of them work in a customer support capacity. With SETS, exchange member firms are having to spend more money making sure they can interact with it. The LSE’s guidance notes point to software changes relating functions such as trading, settlement, accounting, regulatory and management systems. Four software firms have been doing much of this business and they are TCAM Systems, Royal Blue, Soft Option and Paris-based GL Consult. A spokesman for US-owned TCAM said much of the work, making member firms software compatible with SETS, has been done. TCAM, which did work for two member firms is hoping the software written for them will serve as a basis for gaining similar business in Europe and North America. We wrote some of the software from scratch and are hoping it will be a springboard for gaining other exchange type business, explained a software engineer at the firm. He added that TCAM hopes to pick business up from members who are likely to ditch their existing software and seek upgrades later on. The language used was C++ with CORBA as the international standard for the distribution of objects and was implemented with Orbix provided by Dublin-based Iona. The database used is Sybase. Most of the business has focused on 40 member firms looking for host to host link-ups. The TCAM spokesman reckons they have spent from 100,000 pounds for the cheapest solutions to 1m pounds for something more comprehensive. The remaining 360 members will access SETS via specifically configured terminals provided by Reuters and ICV at a cost of 2,000-10,000 pounds a year. This represents a major plank of our expansion, said the spokesman, we will be looking for similar types of business in North America and we have 50-60 people in New York.
Spin-off applications
TCAM built the central software system for the Pacific exchanges in the US and sees the SETS work as complimentary. A software engineer at UK-based Soft Option said the order driven system is completely different from the quote system in terms of the technology required. It entails electronic order matching, catching the execution of orders, different types of displays and being able to receive confirmations, he explained. He said one of the main benefits of having done the business is the potential spin-off applications. such as basket trading applications (eg: simultaneous trading of groups of stocks) or writing software for the order management side, he said. SETS will only be available for shares in the 100 largest companies (FTSE 100) and minimum orders will be for 500 to 1,000 shares depending on the share price. By mid 1998 there are hopes that the system will be expanded to cover the biggest 250 stocks.
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