About the company
David Lester joined the London Stock Exchange as its chief information officer (CIO) in June 2001, during a tumultuous period for the 202-year-old institution. Within one month, the exchange had floated as a public limited company. Its earlier decision to demutualise and commercialise its operations came at a time when many European stock markets were exploring the possibility of cross-border trading and the consolidation of their capital market infrastructure, including clearing and settlement bodies.
There are three divisions of the exchange: broker services, in which the exchange takes a fee on every share transaction; issuer services, in which companies pay an annual fee for listing on the exchange; and information services, now the exchange’s largest revenue generator.
The information services division accounted for more than 40% of the exchange’s total revenue of £193 million in 2002. As well as seeking to reduce the cost of acquiring and managing the IT infrastructure, one of Lester’s main challenges has been to extract value from the huge amounts of financial data that the London Stock Exchange compiles and stores every day. This has brought his organisation in direct competition with some of the world’s greatest financial information providers, including Reuters, Bloomberg and Thomson Financial. That has turned the division from a source of utility services into a profit-driven, competitive operation.
Name: David Lester
Job title: CIO
Company: London Stock Exchange Plc
Key Challenge: Since the exchange went public in 2001, Lester has been charged with seeking new technology-enabled revenue opportunities for the business while keeping its IT cost base under control.
Information Age (IA): In recent years, the London Stock Exchange has moved well beyond its roots as a mutually owned trading floor to become a competitive, commercial organisation, a transformation underscored by its initial public offering (IPO) in 2001. How has that affected the way it operates?
David Lester (DL): The IPO completely changed the whole business drivers. When it was a mutual-based organisation, the exchange had to make sure it broke even. If it made a profit one year it would hand this back to the members; if it made a loss the following year it kind of netted itself out. But now, we’re all about driving revenue and optimising the cost base. That makes the role of IT particularly significant. Technology now represents about 40% of the exchange’s total expenditure and the area I manage, Information Services, is its biggest revenue stream, 43% of the total.
IA: Given that commitment, how have you prevented IT costs escalating?
DL: We have a very demanding IT environment where cost and efficiency have to be balanced with transaction certainty. So that the market can operate, the systems simply have to be working all the time. I can’t think of another industry with such a demanding set of requirements. Today we run on Hewlett-Packard Tandem [fault-tolerant] servers. We’ve had one outage of the system in 10 years and none for the last three. If you compare that to the likes of the French [stock exchange] systems, where they’ve had about 10 outages already this year, then the reliability is beginning to become a competitive advantage for us.
One way we have managed the cost base efficiently is by narrowing our supplier list to four companies that really are best of breed in a whole host of fields. Accenture operates our systems 24×7 and provides developers to us. Microsoft provides consultancy services. MCI provides the network. And HP provides us with things like voice-over-IP services, wireless services, consultants for our web site and a whole slew of other pieces.
IA: Pre-IPO, where did the Information Services division generate revenues?
DL: The business was all about distributing real-time prices to traders. If you bought a Reuters screen or a Thomson screen you paid a licence for their software. We earned a fee for displaying our real-time information on that screen. It was a one-trick business, if you like, and one that was in a cyclical business too. There are fewer traders in the City during a downturn, which means there are fewer screens for me to sell my information to.
IA: Given that, how did you identify new sources of revenue?
DL: Reuters, Bloomberg, Thomson and the other information vendors offer a whole range of other data services around the provision of real-time prices. They collect company accounts information, they store the data away historically so they can draw charts, they distribute information to traders’ screens, they put it on web sites so retail investors can check the latest share prices, they sell them on telephones, and so on. But we are the owners of the data. So the basis of our strategy was to take market share from those services.
IA: How big a challenge is it going up against the likes of Reuters?
DL: Well, we estimate that there is probably a $10 billion industry out there for financial market data and associated technology services. Reuters is a $3 billion to $4 billion piece of this $10 billion industry. They play in every single box on this picture globally, and they also play on all asset classes – equities, bonds, derivatives, you name it. We on the other hand are just in equities and just in the UK. So there is a lot of room for us to grow.
IA: What did you do to underpin that information base?
DL: We built a data warehouse, selecting Microsoft and Teradata as our technology suppliers for that. It was a very bold decision to go with Microsoft’s Windows Server 2003 platform, which was in beta release at that stage. We had a very close collaboration with Microsoft. All the way up to [Microsoft CEO] Steve Ballmer, Microsoft executives recognised that they were going to be able to say their new solutions were ‘enterprise-ready’ by having the products run at one of the biggest stock exchanges in the world. It was good for us too because we were using new technology, which has a much lower total cost of ownership than the kind of middle-aged systems that traditionally exchanges have deployed.
IA: How much value are you extracting from that data warehouse?
DL: It basically allows us to do two main things. First, we can put out information such as money flows, buy-and-sell side pressures and volume-weighted average prices – all in real-time. We intend to extend that to analytics, market caps and other areas. More and more value is being added to the data. It is going directly on to traders’ desktops, directly into their programming engines. They can take that data in from an authoritative, reliable central source and base their trading decisions on it. And all this has allowed us to introduce more and more services and more and more price points. That has raised per-user revenues from, say, £30 a month for some of our data to £40 a month for all the value-added data. It’s very successful because our customers think: ‘I don’t need to calculate that anymore, I don’t need to pay the vendors to do that, I can have that directly from the stock exchange.’
Second, we are able to store the data away historically. Why should the historical price of BT be stored in 1,000 databases right across the City, over and over again? It’s just a commodity. So we say that we will store it once at the centre and you can see five years of prices that you can then build your applications against directly, and we’ll make sure it’s clean and accurate and well maintained.
IA: What other key projects are you working on?
DL: One major one is SEDOL, a global numbering system for securities that helps reduce the number of failed cross-border trades. We estimate about £125 million is wasted [each year] because individual securities don’t have consistent identifiers that allow people to clear and settle trades in those securities. So one guy may think he’s trading Daimler-Chrysler in the UK listing, while the other guy may assume he’s dealing with the German or the US listing of the company. So the clearing of the settlement fails because both have incorrect identifiers.
But we have other ambitions. In January 2003, we acquired Proquote, which is really a starting point for a software services business. There are more than 1,300 Proquote screens in use across 80 corporate customers. Proquote’s innovation was to use the Internet to deliver financial data, a move that created a whole new price point for such information. So you could end up paying as much as four or five times the price of a Proquote screen for a Reuters or a Bloomberg screen.
Lastly, the next business that we’re just starting to develop is to leverage www.londonstockexchange.com as a B2C service. It’s the fourth most visited financial services web site [in the UK] and we can provide data and services from our warehouse, our real-time engine and RNS [Regulatory News Service], and start to build portals for retail investors.
IA: So where do all these developments leave you today?
DL: We now have five main revenue streams from information services: real-time information, value-added real-time information, warehouse services, software services and the web site. In the past the exchange would never have considered these revenue-enhancing opportunities. We’ve had to do new things, like bring in business development people and new product managers and build our own sales force to take these products to market. And the whole IT department has gone from being a provider of utility services to a very commercial operation over two years.