Frustrated by the control that domestic European stock exchanges have traditionally exercised over equities trading, a handful of ambitious trading platforms have emerged recently that go head-to-head with the likes of the London Stock Exchange and Euronext. Turquoise, an equities trading platform backed by nine of the world’s largest banks (Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, UBS, Société Générale and BNP Paribas) started trading operations in late August after two years of planning and an IT infrastructure that came together in just six months.
Along with other so-called multilateral trading facilities such as Chi-X Europe, Nasdaq OMX, BATS that are taking advantage of the opening up of European Union financial markets ushered in by the so-called MiFID legislation, Turquoise is seeking to challenge the “near-monopoly”, the pricing structures, and the questionable customer focus of the classic European bourses. And with some effect.
The volatility in the stock markets in recent months has given the company a running – if somewhat nervous – start. But by early November the company was claiming it had gained 5% market share across European markets in the 310 stocks that are traded on its platform, and 5.2% of trading in FTSE 100 stocks.
It is doing so by promising more rapid processing and less than half the average price of its traditional competitors. Yann L’Huillier, Turquoise CTO and formerly CIO at the Boston Stock Exchange, tells Information Age how the project came together and why market turmoil is good for business.
Information Age (IA): What inspired seven – and then nine – of the world’s largest banks to create an equities trading platform that would sit outside of the traditional European stock markets of the London Stock Exchange (LSE), the Euronext and others?
Yann L’Huillier (YL): The traditional European stock exchanges are characterised by high prices, [are] slow in terms of latency, and are monopolistic.
So the banks behind Turquoise decided to create a competitor to those exchanges, helped by MiFID [the EU’s financial services liberation laws], to create a pan-European exchange that could act as a trading facility for the benefit of its customers – first of all the market participants in Turquoise and the end user.
IA: There have been previous attempts to build rival exchanges, but they did not succeed in taking much trading away from the incumbent exchanges. Why is it different this time? Is technology key?
YL: The market is ready. If I want to reduce the cost of my operating expenses in IT by 15% every year then it is not to make 15% more profit; it is to make a 15% discount on the trading, to be able to decrease the trading costs for the benefit of the customer. You don’t have that choice with our [traditional] competitors.
IA: How has market turmoil impacted Turquoise?
YL: I am not saying that I don’t care if the market fluctuates, but you get your fee based on the value and the volume, not on whether the market is up or down a point. So we like volatility because it means more volume. We don’t like uncontrolled volatility because it may bring us to the edge of our maximum capacity. We have a very good capacity planning process, [based on] 2.5 times the peak we can have on any specific day [Turquoise is capable of sustaining over 6,000 orders per second, with a peak of 14,000 orders per second achievable].
IA: You joined in November 2007; how did you put the platform together in such a short time frame?
YL: The first phase was putting the market model together. That was a huge undertaking and was largely carried by the consortium of banks [before I joined].
It had also chosen Cinnober Financial Technology to provide the core trading system [TRADExpress] with the development of additional features and functions. We streamlined the market model, making sure that it made sense for the time to market [goal].
The second phase was to develop the applications. We hired Progress Software’s Apama to create a market surveillance system based with its Apama’s Complex Event Processing Platform and Detica’s market surveillance and trading expertise. I brought in Gatelab for [connectivity] testing, and our secure hosting services and low-latency connectivity is provided by BT [through its Radianz Ultra Access service].
In the case of Cinnober, there are fewer independent providers of technology for stock exchanges [most are owned by specific exchanges] and it is important to have your own independence in terms of technology. We could not build it ourselves and expect to be up and running in a six or seven months.
With regard to Apama and Detica, our thinking is that using a streaming engine with complex-event processing gives us a competitive edge, because we can change the way we read the market and adapt to the always-changing market conditions.
My challenge was how do I create a stock exchange from scratch, to be launched in less than a year. Normally to build an exchange like that from scratch is an 18-month process. What we’ve done is give the [task] to people who have the right skills and the right knowledge to build the platform.
We were starting from nothing but a plan, the market model, the commitment from the shareholders. We didn’t have a data centre, we didn’t have people.
While I have 12 people in IT at Turquoise, if I look at the size of the team and everyone involved in building the project, it feels more like 120 people.
IA: So you did not feel you needed your own data centre facilities at this stage?
YL: I am not really sure that today having our own data centre would be a plus. If I had my own data centre it would be more difficult to do
co-location [with customers]. The banks have to co-locate. There is also the expense of running data centres – footprint,the cooling, the power.
We are thinking about [that for the future] depending on where the market goes, to have not one data centre and a passive backup, but maybe three data centres – one in London, one in Eastern Europe, maybe one in Southern Europe. And those sites running part of the stocks – cutting
So we’d provide the ability for market participants to connect to any of the three, depending on where they are geographically.
IA: So what are the big challenges and risks going forward?
YL: There are a lot of them but [the individual parts are] not complex. What makes it complex is all the pieces that you have to assemble to bring it together. I like the analogy of a 10,000-piece Lego puzzle that you buy for Christmas for your kids. You have to read the instructions quite carefully; if there was no user manual for it, it would be almost impossible to do. So we had to make sure that our user manual was bulletproof, and that is the role of project management.
So it was critical I had the management in place to control [the matrix of] vendors: a QA manager, an IT manager, business analysts, product managers, and the accounts managers to handle all connectivity with the market participants.
The second part was to design an exchange like you would design a plane. If a plane crashes you are going to kill people, if an exchange crashes you are not going to kill people directly but the consequences for the business can be [fatal]. The point is to build it in a way that it will be resilient, reliable, and [there will be sufficient] testing for that.
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